When it comes to a renewable oils and bioproducts company like Solazyme (SZYM), the development for co-products remains a valuable objective to pursue. The company with a $512 million market capitalization has developed the world's first ability to design oils rather than to simply use what's available in nature. The company converts low-cost carbohydrates into high-margin oils that can be tailored for specific optimized purposes useful for industry, personal care, and even consumption. Yet much of the company's oils are derived from a fraction of the ending output derived from the process. The remaining biomass carries an indeterminate value that could prove useful in more lucrative markets.
The world of co-products is often overlooked by most investors and yet often plays a critical role for businesses specializing in sustainability. Co-products are the products that are jointly produced with another product, and are typically high-revenue outputs derived from the leftover material found in the process of developing the primary product. The development of such co-products are useful when it comes to reducing waste and improving margins for the company's operations.
Finding Large Volume Markets For Co-Products
Yet as a biotechnology company now working on a small commercial scale, Solazyme is seeking to maximize its future profits as it emerges onto a much larger playing field. Currently producing oils at a small production plant in Peoria with a nameplate capacity of 1,800 metric tons [MT], Solazyme expects to open a 5,000 MT plant and a 100,000 MT plant later this year with its partners Roquette Freres and Bunge (BG). A working relationship with Archer Daniels Midland Company (ADM) is expected to initiate another 20,000 MT of capacity in early 2014 which is anticipated to be expanded to 100,000 MT at a later time.
By the end of 2015, Solazyme expects to have in excess of 500,000 MT of capacity online. This massive expansion effort will result in a significant increase in the amount of spent biomass produced after the extraction of the oil product. To be clear, Solazyme's heterotrophic algae fermentation process finishes with an output of oil, biomass, and water. The water is recycled, the oil is sold, but the biomass consisting of fiber and protein remains an open question in regards to its potential value.
Previously, in a 2010 interview, co-founder Harrison Dillon stated that the company was looking into the animal feed or fertilizer markets as a means to absorb such large amounts of biomass. And a large amount of biomass there truly is. In the same interview, Dillon notes that the process yields "hundreds of grams per liter of dry cell weight." This could possibly result in approximately 220,000 pounds of biomass per run when presuming a rate of 200 grams per liter and taking into account the known 500,000-liter vessels found at the ADM plant in Clinton, Iowa.
In a report for the British Columbia Innovation Council in 2009 found here, the authors attempt to place a value on the algae cake derived from heterotrophic fermentation. As seen in Table 14, the presumed value of the algae cake is worth $54/ton - $79/ton when compared against fertilizer costs of the time. This results in a meager revenue stream of $0.027 - $0.0395 per pound. Using such figures would suggest a relative range of $6,000 to $9,000 per run at the ADM facility were the assumptions to be comparable. Such low figures beg the question if additional value could be derived from creating higher margin alternatives.
Cooking Up Valuable Alternative Solutions
It's clear that one of the next research steps for Solazyme rests in driving greater revenues from co-products. In my other article found here, I note that the company appears to be pursuing such a co-product found in developing green hydraulic fracturing solutions for the Oil & Gas industry. This is suggested through patent application #20120247763 labeled "Biomass-based oil field chemicals." In Claim #5 of the application, the language suggests the use of lysed cells which would be indicative of using the leftover biomass after the oil has been extracted.
However, another high-margin alternative may be found in patent application #20120266530 labeled "Pyrolysis oil and other combustible compositions from microbial biomass." This particular application takes special meaning in light of a recent article found here by fellow Seeking Alpha contributor Tristan Brown. In the article, Brown articulates that the fiscal cliff deal initiates subsidies for biofuel produced from the entire microalgae crop rather than just its oil content. This now forms an additional incentive for Solazyme to create biofuels from its biomass remnants. Indeed, these fuels may very well be derived from the same spent biomass that was also used to produce oils for the intended purpose of biofuel production.
Yet patent application #20120266530 goes one step further than stopping at pyrolysis oil. The application also suggests another higher margin co-product possibility found in the development of fire logs created from Solazyme's spent biomass. Claim #6 of the application describes the development of a log for "burning in a fireplace, stove, oven, or furnace." In Claim #9, the application states that this biomass can make up anywhere between 5% to 100% of the burnable composition.
Interestingly enough, in 2007 log manufacturer Duraflame did a study of the global warming reduction benefits of manufactured biowax-fiber fireplace logs found here. In the report, it was noted that over 100 million firelogs are sold annually in North America with California consuming 30% of all those produced. The switch to logs friendly to the environment appears to be growing as indicated by the fact that even Enviro-Log firelogs were recently added to list of items sold at Lowe's (LOW) stores as seen in this press release found here.
At last check, retail store chain Target (TGT) was selling six 5-lb Duraflame Crackleflame Firelogs for $20. At roughly $3.33 per log, this reflects accordingly to the $2.99 cost of the 6 lb Wax-Fiber firelog noted on Table ES-2 of the aforementioned Duraflame study. Rough calculations therefore suggest an average price of $0.50 to $0.66 per pound of firelog. Even after accounting for the costs of production, it stands likely that the production of firelogs could prove to be a valuable market for Solazyme's biomass.
Now barely trading off its lows at $8.41, Solazyme has often been criticized for the lack of revenues and perceived revenue growth. Yet this criticism remains myopic when one considers the fact that even the 1,800 MT plant at Peoria did not come online until mid-2012. The company is already constructing plants needed to boost this capacity up to 106,800 MT by the end of this year. The inability for investors to see how fast manufacturing capability is about to ramp up serves as a blinder for those who rely entirely on the company's financials for their analysis.
Yet another twist that has yet to be truly accounted for by analysts is the development of future co-products. As witnessed through the company's filing of intellectual property, new channels for future revenues derived from the waste material of oil production stand likely in the future. With significant volumes of biomass expected to also increase with the capacity build-out, Solazyme could potentially ramp up its revenues and future earnings much more aggressively than anticipated. By effectively cutting down on waste and opening new channels of growth, Solazyme's stock possibly stands undervalued heading into 2013 and accounting for the years beyond.