Gevo: Biofuels Digest’s 2014 5-Minute Guide

Company Description

Gevo has two proprietary technologies that combine to make it possible to retrofit existing ethanol plants to produce isobutanol, a four carbon alcohol which serves as a hydrocarbon platform molecule. We have developed a robust industrial scale yeast biocatalyst to produce isobutanol without typical byproducts operating at parameters equivalent to commercial ethanol producers. The second piece of technology is a separations unit that operates continuously and removes isobutanol during fermentation.

This helps reduce distillation requirements, thereby reducing process energy consumption. With its exclusive engineering partner, ICM, Gevo completed its first commercial retrofit of a 22 MGPY corn ethanol plant in Luverne, MN and started producing isobutanol in early 2012.

Situation Overview

Gevo had been forced by low yields induced by higher-than-desired levels of bacterial contamination in its fermenters to switch back from isobutanol to ethanol production. Then, as the US drought caused corn prices to soar into the $8 range, Gevo all-but-halted production entirely as it improved its isobutanol process, shored up its cash position, and dealt with litigation.

The perfect storm of poor conditions in feedstock costs, processing yields and a cloudy picture on the “freedom to operate” front caused a number of investors to declare “there goes the neighborhood” and the stock has eventually run down into the sub-$2 range. Today, the company’s market cap is roughly the cost of acquiring and retrofitting its first commercial facility in Luverne, MN.

That was then, this is now.

The stock has not recovered much — but it’s remarkable the progress the company has made, all the same. Analysts are now expecting the company to bring its first production train up later this month with its improved isobutanol process, and moving towards full production on all four trains by year end.

Meanwhile, on the legal front, a Digest reader writes: “Gevo was very clear on their call last night that they had won on all counts and that Butamax had even greater legal risks.  I am sure Dupont disagrees, but the last time Dupont disagreed, they lost a $1 billion award to Monsanto.  And this is exactly the same legal team.”

Perhaps most remarkably, the company continues to enjoy strong support it continues to receive from key industry equity analysts at Piper Jaffray, Raymond James, and Canaccord Genuity — all of whom are rating the stock a buy. Piper Jaffray has a price target of $9 on the stock — more than five times its current value.

In a research note titled, “Less legal drain helps to regain (the focus on) the Train”, Canaccord Genuity analyst John Quealy writes: “While the Street continues to take a wait-and-see approach on the success of this speculative biorefinery business model, we find the technology and opportunity supporting a positive risk/reward long term.”

Looking at the legal front

Here’s what you need to know. Gevo has at this stage complete freedom to operate, and has been a consistent winner to date in the courts on patent infringement.

We asked a friend last week:

“From a legal strategy POV, why it is advantageous for a company like Butamax to sue now, before there is a product on the market?”

We heard back quickly.

“There is absolutely no reason to sue someone before they have a product on the market.  The reason you don’t sue someone before they have a product on the market is because there are no damages for you to recover.  The only reason to sue before there is a product on the market is to try to injure your competitor.  Butamax started this litigation fight in January 2011, years before Gevo could ever have a product on the market.”

Last word, we give to Piper Jaffray’s Ritzenthaler:

“Worst case scenario, in our view. Despite the negligible probability of a negative outcome for Gevo, a common inbound question is: what is the worst case scenario? We define a worst-case scenario as Gevo having to pay a royalty for use of some element of Butamax’s technology. If we assume an industry-standard licensing rate of 2% of revenues, our 2015 EBITDA estimate would be reduced by $25 million, resulting in a $12 stock using the same methodology – nearly 3x Monday’s closing price. In all reasonable likelihood, Gevo will emerge without any such strings attached.”

Looking at the production front

Cowen & Co’s Rob Stone writes, “Luverne is expected to begin limited production in one train in Q2, and be shipping by year end, with ramp pace hinged on corn/oil/isobutanol prices. The paraxylene pilot should also be operational by year end.

Raymond James’ Molchanov adds, “Finally, there is clarity. The plant is ready to start operating in single-train mode in May/June, and management made it clear that the entire facility (four fermenters and three GIFT systems) should be operational by year-end. We project full nameplate utilization (18 million gallons) by mid-2014.”

Looking at the financial front

In looking at the work-ups by the analysts, we see some different assumptions on timing, the expected price of isobutanol and the cost of inputs, but all analysts agree that a rapid expansion of revenues is expected throughout the 2013-15 period and beyond.

The consensus view? Revenues climbing from $14M this year to $99.4M in 2014, en route to $317.2M in 2014 — and analysts expect the company to reach break-even in 2015.

Looking at Gevo and Butamax’s relative progress

Butamax is inherently more opaque (as a private company), and comparisons are somewhat difficult to make. However, we understand that Butamax’s demo plant in Hull is about the same size as the demo plant Gevo did in Denver in 2008. Gevo has subsequently built a 1 Mgy demo plant in St. Joseph, MO and the 18 million gallon plant in Luverne.

By that measure, there’s some evidence that Gevo is something on the order of 1-2 years ahead of Butamax in commercialization — and Butamax has confirmed that it expects to go into commercial scale production some time next year.

On the customer front, both companies have signed up an impressive roster of plants for their early adopter conversion program. However, Gevo has a definitive deal for its Redfield, SD plant, whereas all the others for both companies are at this stage, so far as is publicly revealed, non-binding letters of intent.

In addition, Gevo has firm offtake agreements with SASOL and the US Air Force.  In addition, deals of a less definitive nature with Coca-Cola, Lanxess, Mansfield, Total and others.   All of which supports the view that Gevo is leading by a year or more.

The stakes

Well, there’s a lot on the line. From a fuel POV, we’ve pointed out before that a conversion of the US ethanol fleet to isobutanol is the surest low-cost, low-pain path towards meeting a target of 36 billion gallons of (ethanol equivalent) renewable fuel by 2022. The reason? Blend wall, baby. The US could use as much as 22.9 billion gallons of ethanol-equivalent by switching to isobutanol, before it reached a blend wall, owing to butanol’s higher energy density and blend restrictions.

By contrast, anything above 12 billion gallons of ethanol blended into the fuel supply in 2022 supposes moving beyond E10 blending to controversial business cases associated with E15 through E85.

Rankings

#7, 2013-14 50 Hottest Companies in Bioenergy

#10, 2013-14 30 Hottest Companies in Renewable Chemicals

Biofuels Digest Awards

2012 Best Project (pilot) Award: Gevo, Virent, Avantium — renewable paraxylene

Profiles

Profiled in 12 Bellwether Biofuels Projects for 2013

Featured in: Gevo stock repurchase reflect’s company’s confidence, says analyst

Won Biofuels Digest’s 2012 Best Project (pilot) Award: Gevo, Virent, Avantium — renewable paraxylene

Featured in: Gevo defeats Butamax’s injunction in appeals

Featured in: Is Gevo still Gevolicious?

Fuel type:

Gevo will produce isobutanol, a four carbon alcohol that can be dehydrated using well known technology to isobutylene, a C4 hydrocarbon. Isobutanol has 30% more energy content than ethanol and can be blended into gasoline without modifying automobile engines. Isobutanol is a low RVP blendstock and less soluble in water than ethanol. It can be transported in pipelines and be dispensed in existing retail pumps. Isobutanol is a biofuel that carries a RIN value of 1.3 and It can be an advanced biofuel from corn if it achieves a 50% GHG reduction.

Isobutanol also has a market as a chemical solvent. The opportunity for isobutylene spans many C4 markets in jet fuel, paraxylene, PET and other multi-billion dollar applications in fuels, synthetic rubber, chemicals and plastics.

Gevo has a number of off-take agreements and has announced non-binding letters of intent to supply Total for gasoline blendstock; United Airlines for biojet; Lanxess for butyl rubber; and, Toray industries for p-xylene.

Major investors:

Khosla Ventures, Burrill & Company, Virgin Green Fund, Malaysian Life Science Fund, Total SA & LANXESS

Past milestones (09-13):

Gevo successfully commissioned its 1MGPY demonstration plant in late September, 2009 in St. Joseph, MO in cooperation with ICM.

In September of 2010, Gevo completed acquisition of the 22 MPGY ethanol plant owned by Agri Energy in Luverne, MN.

Gevo started commercial production in summer 2012 in Luverne, MN.

In August 2013, Gevo announced that it has brought its second million liter fermenter and GIFT system online at its Luverne, Minn. facility.

“We have been successful in operating full-scale fermentations using our GIFT system – which separates the isobutanol from the fermentation broth – on a second million-liter fermenter and GIFT system,” noted Patrick Gruber, Gevo’s chief executive officer. “This serves to further validate our technology and plant know-how. We plan to bring the final fermenters and GIFT system online at Luverne later this year, testing run rates, then ramping up production and sales over the balance of 2013 and in 2014.”

Gevo will sell the isobutanol it produces in the specialty chemicals and specialty oxygenated fuel blendstock markets, and use it as a building block to make jet fuel and chemical products, such as paraxylene, which is converted into PET and used in the production of bottles and fibers.

In December 2013, In Minnesota, Gevo says that the Army has successfully trialed the company’s isobutanol in a 50/50 blend in a Black Hawk helicopter in Alabama last month. The announcement was delayed due to a $23 million fundraising round. The isobutanol was produced at the Gevo facility in Lucerne and converted into jet fuel at the company’s facility in Silsbee, Texas.

In December 2013, Gevo announced the closing of its previously announced public offering of 18,525,000 common stock units, at a price to the public of $1.35 per unit. Overall, the company raised $25 million.

Each common stock unit consists of one share of common stock and a warrant to purchase one share of common stock, which are immediately separable and were issued separately. Gevo also issued warrants to purchase an additional 2,778,750 shares of common stock pursuant to the exercise of an over-allotment option granted to the underwriter.

The aggregate net proceeds to Gevo from the offering are expected to be approximately $22.6 million, after deducting underwriting discounts and commissions and estimated offering costs.

3 major milestone goals (2014-15)

Stabilized production at the Luverne, MN plant.

In June, energy analysts wrote:

“After a 5-6 month hiatus to combat contamination-related production issues,” wrote Piper Jaffray’s Mike Ritzenthaler, ” the phased re-start of Luverne has surpassed its most difficult and important hurdle in our view – reliability of production. While we had fully anticipated this restart, we continue to view today’s announcement, along with significant wins in court with respect to their IP position, as unequivocal positives for the stock, and opens the door for a meaningful volume ramp over the next 12 months.

“We are evaluating the implications to our model. We are in the process of evaluating the restart timing and potential volume ramp on our model. We do believe that Gevo will sell the in-spec production through their existing offtake agreements and use modest volumes to continue market seeding. We believe that a single train is capable of a run-rate of 3-5 million gallons per year, with the full rate of 18 million gallons coming with all four fermenters running.”

At Cowen and Company, Rob Stone and James MEdvedeff wrote: “Still a Long Way to Go. We believe only a few runs have been completed, and operating metrics and production cost are likely far from optimal at this point. Additional financing should be needed within a year. Yield, productivity, cycle time, and purity levels were not disclosed, but we believe that one fermentation train produced enough isobutanol to test one GIFT separation system at full scale (which was not the case last summer). Plans appear to remain on track to bring up all four fermentation trains and all three GIFT systems by the end of the year, which would enable demonstration of 1MM gallons per month capability. If successful, a ramp to full nameplate (1.4-1.5MM GPM) could be realized by H2:14. However, we believe consistent, repetitive, volume production, at commercial metrics and cost, in all operating conditions, may be a difficult task. Unforeseen pitfalls could materialize as the complexity of multiple trains feeding three GIFT systems is added. Also, if purity is not high enough, additional distillation equipment may be needed.”

They also plan to bring another 50-200 MGPY of capacity into the development pipeline, commencing with the Redfield Ethanol Plant in Redfield, SD. Further commercial supply agreements are expected to be announced.

Business model:

Gevo has developed its technology to retrofit ethanol plants to produce isobutanol. Gevo has a flexible business model, i.e., it will own and operate production capacity or align with others in joint venture or lease arrangements. Gevo will also license its technology. We plan to partner with cellulosic conversion companies to develop and commercialize cellulosic isobutanol for the gasoline and jet fuel markets.

Fuel cost: Gevo’s isobutanol should be competitively priced with C4 petrochemical streams and low RVP gasoline blendstock components.

Competitive edge:

Gevo’s proprietary retrofit technology is a cost efficient (approx. $0.40/gallon) and rapid (12 months) retrofit of first generation ethanol capacity to make isobutanol. Gevo’s exclusive collaboration with ICM, the premier engineering services company in the ethanol industry with over 60% of the installed capacity, is another competitive advantage. Finally, our flexible business model enables us to work with investor owned and farmer owned ethanol producers through acquisitions, joint ventures or lease arrangements. Gevo will be able to deploy cellulosic butanol technology as soon as conversion technology is available for biomass refineries.

Alliances and Partnerships:

Gevo has an exclusive collaboration with ICM for the retrofit of ethanol plants in North America. Gevo also has an exclusive technology alliance with Cargill to develop a yeast biocatalyst for cellulosic isobutanol.

Development stage

Commercial

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