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KiOR, Inc. (KIOR)

Q4 2012 Earnings Conference Call

March 18, 2013 10:00 a.m. ET

Executives

Max Kricorian – Director of Finance

Fred Cannon – President and Chief Executive Officer

John Karnes – Chief Financial Officer

Analysts

Edward Westlake - Credit Suisse

Henrique Akaishi - Piper Jaffray

Stacy Hudson - Raymond James

Rob Stone - Cowen and Company

Jerimiah Booream - Deutsche Bank

Mahavir Sanghavi - UBS

Brian Lee - Goldman Sachs

Operator

Welcome to KiOR’s Fourth Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session, after the speakers complete their remarks. As a reminder, this conference call is being recorded for replay purposes.

The telephonic replay will be available approximately two hours after this call has been completed and remain available until March 25, 2013. The number to call for the replay was included in the earnings release issued earlier this morning. This call is being webcast and will also be available on the company’s website for approximately 90 days in the Investor Relations Section of the site.

I would now like to turn the call over to Max Kricorian, Director of Finance at KiOR.

Max Kricorian

Good morning. Thank you for joining us to discuss KiOR’s financial and operating results for the fourth quarter of 2012. With me today are Fred Cannon, President and Chief Executive Officer; and John Karnes, Chief Financial Officer.

I would like to remind everyone that statements will be made during this call that are not historical facts and are forward-looking statements. These statements about the company’s future expectations, plans and prospects include statements regarding the following. The projected timing of and costs related to production from and generation revenues at the company’s Columbus facility.

The company’s plans to build its next commercial facility in Natchez, Mississippi, the company’s plan to obtain additional debt and/or equity financing, government policy related to renewable fuels and other statements containing the words believes, anticipates, plans, expects, intends, and similar expressions. These forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties.

The company cautions that a number of important factors could cause our actual future results and other future circumstances to differ materially from those expressed in any such forward-looking statements. These important factors, and other factors that could potentially affect the company’s financial results are described in the section called Risk Factors, in the company’s most recent annual report on Form 10-K for the fiscal year ended December 31, 2011 and in the company’s other quarterly filings with the SEC, which are available through the investor relations section of the KiOR website at www.kior.com or on the SEC website at www.sec.gov.

The company may change its intentions, beliefs or expectations at any time without notice based upon any changes in such factors in the company’s assumptions or otherwise. The company undertakes no obligation to release publicly any relations to any forward-looking statements to reflect events or circumstances after today or to reverse the currents of unanticipated events. Therefore, you should not rely on these forward-looking statements as representing the company’s views as of any date subsequent to today, March 18, 2013

Now I will turn over the call to Fred Cannon.

Fred Cannon

Thanks Max. Good morning and thank you for joining us on our conference call. We believe that KiOR’s plan to grow in long term stockholder value is clear to our team’s ability to methodology hit our milestones. In order to address the three mega risks to our business model. Scale up our technology risk. Can we operate our technology at commercial scale? Regulatory risk. Can we sell our cellulosic gasoline and diesel fuels into the mandated market provided by RFS2? And financial risk. Can we secure the financing through the start of operations of Natchez?

As our last update in November, we have made substantial progress in addressing all three of these risks. Yesterday our Columbus facility made the world’s first commercial shipment of cellulosic diesel fuel, the most important step in answering the remaining questions surrounding our scale up risk. With this shipment, we have now operated our proprietary biomass to fuel platform from beginning to end at commercial scale, with the final hydrocarbon products, gasoline and diesel produced by our facility on specification and ready to drop into American cars and trucks.

A mitigation of scale up risk due to commercial production of cellulosic gasoline and diesel at Columbus is a remarkable achievement by the KiOR team. In four years we have successfully achieved a 20,000 ton scale up in our proprietary biomass to fuels technology from proof of concept in our pilot plant to our demonstration plant and now to our first commercial scale facility at Columbus. In less than two years after breaking ground in Columbus, we have constructed, commissioned and operated our technology on a commercial scale. Quality of the world’s first commercially produced cellulosic gasoline and diesel has exceeded our expectations and I couldn’t be more proud of the KiOR team for this accomplishment,

I do recognize however that many of you were expecting us to commence commercial shipments late last year, consistent with our guidance from our last conference call. Did we set an aggressive target for ourselves? Yes. Am I disappointed that we missed our target? Absolutely yes. Did we encounter unexpected startup issues unrelated to our technology? Yes we did. However, we have overcome these normal startup issues and we have proven that KiOR’s proprietary biomass to fuels technology works at commercial scale at Columbus.

In fact, we know now that our technology performs better in terms of quality as it is scaled. From very good oil at the very small pilot plant to even improved quality oil at the demo and now to our best ever quality oil made at Columbus. So high in quality we’re converting over 90% of our oil from Columbus into transportation fuel. This compares to conventional crude oil which is globally only 70-70% conversion.

Now, our focus at Columbus turns towards achieving steady state operations. Until we have the facility fully lined down, which we believe could take at least nine months, any guidance that we might give to the basic metrics of plant performance that we use in petrochemicals or have to have an unusually wide error bar around that. Given what I just said about the fact that production volumes in the first quarter will be negligible, looking at the remaining nine months of the year, we believe our volume expectations to be approximately 3 to 5 million gallons for the balance of the year. We have learned a lot at Columbus over the last several months and we believe we can apply the learnings from Columbus to the engineering and design of Natchez.

In addition to our scalability, we also made strides to derisking our business on the regulatory front, which gives KiOR fuels access to the mandated RFS2 markets, a market that we expect to serve which could serve as a catalyst for KiOR’s rapid growth and expansion. The EPA just recently approved what we call the gasoline pathway or KiOR’s production process for the world’s first commercially produced cellulosic gasoline. This is the last hurdle to KiOR’s ability to fully participate in the mandated RFS2 market for its products. And what this means is that every gallon of cellulosic gasoline and diesel that comes out of KiOR’s Columbus facility and all our future facilities will generate 1.5 or 1.7 cellulosic grams per gallon, which unlocks significant additional value for KiOR relative to nearly all other renewable fuel companies.

Also, earlier this month the EPA approved an increased Part 79 registration for blending of KiOR’s cellulosic gasoline at levels up to 25%. Allow me to translate the significance in this milestone. At a 25% blend, KiOR has a 33 billion gallon per year domestic market for its cellulosic gasoline. This is more than the entire RFS2 renewable volume obligation in 2022. By comparisons, this is double the size of the ethanol market and without any blendwall limitations.

In early January, President Obama signed the American Taxpayer Relief Act of 2012. After passage by both houses of congress in connection with the fiscal cliff, much to our surprise and nearly everyone else’s in the biofuels industry, this package included a one year extension of the $1.01 per gallon cellulosic biofuels producer tax credit. This credit had expired at the end of 2012 and is now extended through 2013. While not having an immediate financial impact on KiOR this year, we view this extension as noteworthy because it demonstrates broad based support for cellulosic fuels on Capitol Hill and the White House.

EPA has also set the RFS2 volume requirement for cellulosic fuels in 2013 at 14 million gallons of ethanol equivalent, of which EPA projects KiOR would produce 8 million gallons of ethanol equivalent, which is about 5 million gallons of actual pure hydrocarbon fuel. We agree with EPA’s forecasting method since it will ensure that every gallon of cellulosic fuel produced will benefit from the mandated market.

There are a few who are dedicated to challenging any regulatory structures supporting renewable fuels. These parties primary argument has revolved around the simple assumption that cellulosic fuels have not and cannot be made at commercial scale, an assumption that starting today is no longer valid. Today, increased investment would increase production capacity rapidly. So RFS2 is serving its purpose of increasing investment interest. As companies like KiOR continue to bring cellulosic fuels to the market, we believe that the challenges to the regulatory structure and the perceived risk that go along with them will only continue to diminish.

Please allow me to share with you what I see in every gallon of KiOR fuel. I see a fuel that is produced by American workers, in towns whose economies have been devastated by the departure of pulp and paper industry. I see a drop in hydrocarbon fuels with the smallest carbon footprint of any fuel in the world today. I see the potential for KiOR facilities across the country in areas where shutdown paper mills once operated with an abundance of non-food feedstock to make our fuel. With every gallon of KiOR fuel, I see America one gallon closer to energy independence.

Turning to financing. We believe that two factors will derisk KiOR’s ability to receive the funding that we need for Natchez in a way that maximizes long term shareholder value. First, achievement of milestones. For those of you who are new to KiOR’s story, we have always raised the funding we have needed for our business plan because we have successfully executed and achieved our milestones. What we have reported to you today commercial production at Columbus, cellulosic RINS for our fuels, and the ability to blend our gasoline up to 25% level, are significant milestones that we believe will provide the financing markets with the confidence to fund the construction of our planned Natchez facility.

Second, flexibility. In our experience, one of the best ways to drive value in any financing process, whether debt or equity, is to have the flexibility to raise financing when the market allows a company to maximize the value for its existing shareholders. Indeed, we have passed on some financing opportunities because we have refused to sacrifice long term shareholder value just to secure the first available funding source. That’s why we are so pleased to announce that two of our longest standing investors, Alberta Investment Management Company and Vinod Khosla have agreed to amend the loan agreement that we signed with them last year in order to give KiOR the flexibility it needs from a liquidity perspective so that it can drive financing for the Natchez facility on terms that best serve the long term value of the company and its stockholders.

Specifically, we have increased the potential launch under the agreement from $75 million of current principal to $125 million, with affiliates of Vinod Khosla committed to funding that additional $50 million upon request from the company. If funded, this additional funding would automatically convert into equity in connection with future financing for the Natchez project, which further enhances our flexibility going forward.

In addition, both AIMCo and Vinod Khosla have agreed to extend paid-in-kind interest through maturity and delay amortization until maturity. We consider the $50 million commitment from Vinod Khosla and other changes to the loan agreement from AIMCo to be a validation of our ability to successfully execute and hit our milestones, including what we have reported to you today. They have been to Columbus and seen firsthand our technology at commercial scale and I’m excited that the investors who know us best recognize not only what we’ve accomplished to date, but what we have the potential to become. Their renewed commitment to KiOR gives us the flexibility to be able to continue to execute our business plan, but now with a clear line of sight depending on market conditions to completing our Natchez facility so that we can start construction in the second half of this year.

In conclusion, 2012 was a year of achievement for KiOR and now we need to focus on what we need to achieve in 2013. Bring our Columbus facility to steady state operations and line down operations consistent with name plate, continue our efforts in R&D for additional yields in cellulosic fuels from our proprietary biomass to fuel technology. And finance the Natchez project in order to commence construction of the facility in the second half of this year. We believe our continued execution on each of these three goals will further mitigate the risk to KiOR’s growth and will provide a vehicle to drive shareholder value for years to come.

At this time, I’ll turn the call over to John Karnes to cover our financials.

John Karnes

Thanks Fred. Very quickly, in the fourth quarter we reported a net loss of $29.7 million as compared to a net loss of around $27 million for the third quarter of this year and a net loss of $14.9 million in fourth quarter of last year. The Q4, 2012 loss includes $4 million of non-cash, stock-based compensation expense, which is about $400,000 higher than the sequential quarter this year and $2.6 million higher year-over-year. During Q4 we booked our first sales out of our demonstration facility. As Fred mentioned, this was done for fleet testing purposes and resulted in our generation around 1,700 cellulosic diesel RINS which we sold for $1.20 per gallon of ethanol equivalent. That netted us $2.04 per gallon of physical fuel equivalent.

This reflects 100% of the then prevailing advanced RIN pricing plus related cellulosic wave of credit in both cases adjusted upwards to reflect the higher energy value of our diesel versus the ethanol baseline on which RINs are denominated. Please note that this transaction was primarily done for testing purposes. So as a result the related cost of revenue has numerous and extraneous expenses in it, and it’s not indicative of what our manufacturing cogs would look like at commercial scale.

Without production operations at Columbus during the fourth quarter, we again recorded no cost of revenue at the plant. Instead, we recorded startup costs totaling $12.2 million which was up $2.1 million from the sequential quarter and up $11.5 million year over year. Of the $12.2 million startup in Q4, about $5 million was for fixed costs, payroll, maintenance, insurance, et cetera and the rest was related to utilities, raw materials as well as incremental overtime contract labor and rentals.

Consistent with the two prior quarters, we again booked all startup costs from Columbus to G&A in Q$ in as much as the plant was not online. Since we started shipments in the second half of March, we will begin booking startup costs March forward to costs of product revenue.

Research and development costs for the fourth quarter were $9.5 million, which is pretty- flat from the prior quarter of this year and $0.5 million than a year ago. This increase was due largely to higher compensation and depreciation expenses, partially offset by lower maintenance and lower commissioning costs at our demo facility.

G&A expenses for Q4 were $20.2 million which as I mentioned earlier included $12.2 million of Columbus startup costs. G&A expenses were up $2.8 million from Q3 of this year, reflecting $2.1 million higher startup costs at Columbus and higher non-cash stock based compensation quarter over quarter. Year over year, G&A expenses were $14.3 higher than Q4 last year. $11.5 of the increase was Columbus startup and the remainder related to higher stock comp.

Moving to our balance sheet, cash and cash equivalents at yearend stood at approximately $41 million. This is a $33.4 million decrease from Q3, particularly reflecting our Q4 operating loss, financial commitments, ongoing R&D and engineering costs for Natchez.

As Fred mentioned, during the year we took two steps to ensure our continued ample liquidity first. We reduced our debt service burden by amending our $75 million liquidity facility from last January to provide for a continued peak all the way through to the facility’s maturity in 2016. We also provided for a bulk maturity rather than monthly principal amortization as originally scheduled. Second, we expanded our borrowing capacity under the facility and negotiated with Vinod Khosla for an additional $50 million commitment under our additional extensions from the facility which we can draw upon request on a pari passu basis with the original loan.

So these three steps will ensure our financial wherewithal to execute our business plan well into 2014 in order to make sure we get Columbus to steady state operation, we continue our yield improvements through our active R&D program and then we can secure the financing needed to break ground on Natchez.

Looking ahead, for 2013 we would expect our R&D expenses in Q1 to be in line with our Q4 level and we would anticipate G&A costs, excluding Columbus to be around $8 million again. So it’s pretty straightforward. Columbus on the other hand is not just straightforward to provide guidance on. As Fred mentioned, while we’ve commenced shipments but have not cut over yet to reaching or extended operations and we don’t expect to be cut over for some time. As a result shipments can be expected to be a bit sporadic as units operations are optimized over the months again, gradually smoothing later in the year as the plants focus turns from lining out to maximizing utilization and efficiency. Until then though, for planning purposes we are assuming that our 2013 total production target of 3 to 5 million gallons will simply occur linearly starting from essentially zero in Q1.

Similarly, until we’ve settled into normal delivery schedules with our three customers, we can expect our ASP’s to continue to be reduced by somewhere between $1 and $1.50 a gallon. I want to reiterate again to everyone, these discounts are not structural. They do not reflect a lower value proposition for KiOR fuels as compared to petroleum based fuels and they can be expected to taper off in the future as we achieve regular delivery schedules with our customers.

As far as our costs of product revenue goes, Q1 as I mentioned will be a transitional quarter. In the past we’ve taken all Columbus startup SG&A. Commencing in March, we’ll begin booking all fixed plant costs, depreciation and variable costs to cost of production revenues since we’re now in production mode. Columbus costs for January and February will remain in SG&A.

In terms of our cost structure going forward for 2013 at Columbus, we can continue to plan on fixed costs of around $5 million per quarter, excluding startup related expenses, amortization and depreciation. Again these represent our baseline costs composed of primarily maintenance, personnel, insurance, leases, taxes, et cetera. In addition, we anticipate between $3.5 million and $4.5 million of continuing startup costs in Q1 related to overtime contractors and make-right and until we’ve obtained more production history for internal planning purposes, we’re just assuming these startup costs decline rapidly over Q2 and Q3, tapering off completely by the end of Q3 as the facility lines out in the second half of the year.

We expect variable costs in Q1 to be minor, probably around $0.5 million and to ramp up again linearly is our assumption with our production outlook to the $4 million to $5 million range based on our current production outlook and the 3 to 5 million gallon total annual production target.

Moving to interest expense, after March we’ll no longer capitalize interest at the rate we have been and we anticipate interest expense for Q1 to be around $2 million. As we move along the front-end engineering and design phase of Natchez, we expect our CapEx in Q1 to come in right around $5 million for the quarter.

So with that, that concludes my comments and I’ll turn the phone back over to the operator and Fred and I will take your questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Edward Westlake of Credit Suisse.

Edward Westlake - Credit Suisse

Good morning, Fred. Good morning, John, and congratulations on selling the first cargo of diesel. I guess you’ll sell gasoline once the EPA has approved a pathway, I guess soon. But I guess the first question from my side is really around the startup issues. You say unrelated to technology, and these are just normal issues in terms of lining out a plant. Can you give us some color on some of the issues that you’ve run into and that you are overcoming?

Fred Cannon

Sure, Ed. I think probably in the big picture they’re all normal startup issues unrelated to our technology. We had one event which was probably account for almost half of our total delay and our actual production of fuel and that was in late November a total blackout in the city of Columbus which also blacked out the KiOR plant. It happened at probably the worst possible time it could happen when the plant was not fully running at rate, which of course then we supply our own power. So it’s not a thing. So to have on a very cold night a total blackout caused obviously, just like a refinery, a lot of pluggage and that took us many weeks to work through and then some residual after that. And then the other was just normal startup things of getting it in optimal operation. But thank goodness we have all that behind us now and we’ve made fuel. So we’re quite excited about that.

Edward Westlake - Credit Suisse

And then I guess you’ve given a good range, 3 million to 5 million gallons. It's good to have a number out there. The uncertainties are really around utilization as you line out the plant, and then yield as that increases. Can you give us some color on, say, confidence intervals? Is it utilization? Is it yield in terms of what's driving the big uncertainty as you look at the plan for the year?

Fred Cannon

I think Ed I would say it’s all of the above. We’re just starting up or we’re still in the startup operations. As we run the plan more and more we’ll get more on that. We’ve obviously to this point been focused on making good quality, not necessarily quantity. And we’ll find things we can improve in the plant so we’ll shut it down and make those improvements. So it’s a little bit of both I would say.

Edward Westlake - Credit Suisse

Then a final one, roughly when, if you had to make a guess, do you think you'd have enough experience with Columbus that you could start to start pushing forward on Natchez, funding aside?

Fred Cannon

John, you want to comment?

John Karnes

Funding aside, Ed, what we’ve said is as soon as Columbus begins producing and we can raise the capital we’ll be in a position to break ground. So as a management team we think within 60, 90 days after we raise the funding we’ll be ready to break ground and move forward. So everything we’ve learned from Columbus has all been confirmatory. We have learned a lot, but it gives us more confidence on our ability to execute Natchez on time and on budget and after a quarter or so of production which is what we’ve always been using as the predicate if you will for raising funding for Natchez, after a quarter of production we should have enough data for us to know more about utilization and more about yield and know exactly how to advance with Natchez.

Operator

Your next question comes from the line of Mike Ritzenthaler of Piper Jaffray.

Henrique Akaishi - Piper Jaffray

Hi guys. This is Henrique in for Mike. Sorry about that. The impact of RIN values have recently escalated. Have you guys seen any similar phenomenon in your products?

John Karnes

Have you seen a correlation in the value of our products pricing and following RIN value?

Fred Cannon

Yes. Of course there are two things happening here. Of course the ethanol RINS with the blendwall imminent, but what we’ve seen in the advanced RINS, there are fuels produced the only cellulosic RINS so far. But in the advanced RINS we’re seeing those come back strong to where they were historically and where we think they should be. So we’re seeing quite some upside there.

Henrique Akaishi - Piper Jaffray

And is the CapEx budget for Natchez tracking with your expectations?

Fred Cannon

Yes. Kellogg Brown & Root of course built our plant in Columbus and they’re in the process of doing the feed on the Natchez project. So we’re still developing the detail engineering and the detail cost of it.

Henrique Akaishi - Piper Jaffray

And then regarding inventory, if you were to compare fourth quarter to third quarter, what portion of the inventory was feedstock versus work-in process?

John Karnes

It’s almost all feedstock.

Henrique Akaishi - Piper Jaffray

All feedstock?

John Karnes

Yeah.

Henrique Akaishi - Piper Jaffray

And then last one for me, (inaudible) your expectations for the year, and you mentioned linear ramping into -- for the year for production of 3 million to 5 million. How much of that do you expect to sell for the year? I think you got it 400 to 500 million gallons of product. Can you give us some more color on your expectations?

Fred Cannon

That’s sales versus production because yes, we wouldn’t expect to sell everything this year. We wouldn’t -- in terms of finished product, absolutely.

Operator

Your next question comes from the line of Stacy Hudson of Raymond James.

Stacy Hudson - Raymond James

Just on Columbus, I know you’ve built in a lot of redundancies there. Have you noticed those to be sufficient or maybe overly sufficient and maybe there's some flexibility with Natchez in that regard?

Fred Cannon

Yes. I think so, Stacy. As I mentioned in the script without detail, we’ve learned an awful lot about Columbus and operating in so far. We did build a lot of flexibility and a lot of redundancy on Columbus and we’ll be value engineering the Natchez project to get in the sweet spot of benefit versus cost for the Natchez project.

Stacy Hudson - Raymond James

Okay. And then I guess it sounds like the plan would still be to use wood chips for the first year as you ramp up to capacity for Columbus. Is that still the idea?

Fred Cannon

Yes. That would be a good assumption at this point.

Operator

Your next question comes from the line of Rob Stone, Cowen and Company.

Rob Stone - Cowen and Company

I wonder if you could comment on any color or updates on catalyst development and which generation of catalyst you are using at Columbus at this point. Since you had to do a shutdown and restart, it sounds like, did you refresh to the latest catalyst?

Fred Cannon

Okay, sure. On the catalyst I gave a report I think in the last call where I said we’ve made a step in our catalyst development or until our next generation. Of course in Columbus we’re using catalysts from a couple of generations ago and we will be in the future changing to the latest generation.

Rob Stone - Cowen and Company

So that convert might happen when, Fred?

Fred Cannon

As we continue to get the plant stable and lined up and let’s say perfect that catalyst commercially.

Rob Stone - Cowen and Company

Okay. With respect to the blackout, that seems like a pretty significant issue. How do you plan to mitigate that risk going forward? And would you design something differently in Natchez to avoid that?

Fred Cannon

Yes. That’s a once in a lifetime event where -- worst possible time, worst possible event. What we’re protected against that as you know once the plant is up and running, then it supplies all its own power. We’ve even so far we’ve run the plant just totally disconnected from the grid. So during those times we have backup which is the grid. So you have the redundancy there. You’re only vulnerable as a refinery or any petrochemical process during the time when you’re in that ramping the rates. So we’re looking now and doing a good analysis of what our learnings are there that we can apply to Natchez to even mitigate that further.

Rob Stone - Cowen and Company

Okay. Finally, any comment on what you need to spend in the near-term on long lead-time stuff for Natchez in order to stay on plan for the second half of this year?

Fred Cannon

Yeah. We feel pretty comfortable there. We’ve worked with the procurement and suppliers of the long lead items and we’ve been able to compress that schedule. So we don’t see a problem there fitting our schedule.

Rob Stone - Cowen and Company

So are you able to say by when? I realize you don't have final dollar amounts yet; but when might the onset of significant CapEx be? Is that closer to when you get ready to start construction?

Fred Cannon

Yes, it would be after financing. After we have the financing locked, it would be at that time, Ron.

Operator

Your next question comes from the line of Vishal Shah, Deutsche Bank.

Jerimiah Booream - Deutsche Bank

This is Jerimiah Booream calling in for Vishal. Thanks for taking my question and congratulations on the shipments. I was just wondering if we could get any more color around financing of Natchez and the timing. Any more details you could provide?

John Karnes

Yeah. What we’ve said - let me start off by saying we’re limited just given our current activities and what we can say about financing today. But what we’ve said in the past was we probably need 60 to 90 days of production history from Columbus at minimum before we could go out and expect to get a good execution from financing. So I think that is still valid. So I think that probably puts u sometime early summer at the earliest. We’re fully doing everything we can to bring that forward, but as we’ve said before from a lot of effort we think that we probably need that 60 to 90 of position history at very minimum. So that puts some context around the timing. The plan is what we’ve always said. We want to raise around $200 million of equity and $400 million of financing for the project and as I started out saying, just given our current activities we really can’t go into a more specific scenario right now.

Jerimiah Booream - Deutsche Bank

Yes, understandable. And just one more question on feed stocks for Columbus and I guess Natchez also. Is there any possibility of bringing those costs down more? I believe last quarter you'd said high $70s roughly?

John Karnes

Yeah. Those are under intermediate term, short term cost contractual arrangements where we are paying a premium for flexibility. We’re not operating yet in Columbus under our long term facility with Catchlight, which is a joint venture between Weyerhaeuser and Chevron. So we are paying a premium for feedstock now as you always do in a startup situation, where you’re start and stop and start and stop. So we do believe that longer term that the $72.50 price for clean wood chips which is our highest price point in our supply chain is a bit priced.

Operator

Your next question comes from the line of Mahavir Sanghavi, UBS.

Mahavir Sanghavi - UBS

Hi, Fred and John. Thanks for taking my question. Just first question about the Columbus startup. Fred, wondering if you could give us some more color on the rate or the frequency of production and the consistency of production versus your design rates. Specifically, Fred, what I'm interested in knowing, are you seeing a batch that produces close to design rates and then you have a bunch of bad or lower efficiency batches? Or are you seeing more gradual improvement in your batch to batch? Thank you.

Fred Cannon

Yes. Now, what we’re seeing Columbus is just operability issues and that can be a pulp. It can be in a control valve, other things that are very, very normal when you’re starting up a plant. Technology, the chemistry, we couldn’t be more happy about. Every time the converter runs it makes a very, very high quality beautiful oil and now we’ve commissioned and run the upgrading section and product quality we couldn’t be more happy with. So it’s just mechanical, operational things that we just have to work through and get the reliability up.

Mahavir Sanghavi - UBS

Got it. Thanks for that, Fred. And John, a question on OpEx, Given some of your startup costs for Columbus in 1Q and you said it's going to come down in the second half. How should we think about how low you can get on the OpEx in this little bit of a lean patch, until you get a facility lined up and you start Natchez?

John Karnes

Well, just to start with the components, the fixed cost is around $5 million and that is fixed. So there is nothing we can do there. It takes -- insurance is insurance and you’ve got to pay the light bills. Beyond that, in terms of variable cost, it really depends on the nature of the startup operations. Every time you start up you use natural gas, you use torch oil. You use those types of things. You have to have contractors. You’ve got rental equipment on site. So again what we said is that and again without any more production history, Mahavir, we’re just assuming Q1 we’re going to be in that .$3.5 million to $4.5 million range for startup costs. I see them probably going down 50% in the next quarter and then down to zero. But until we have more actual experience and we know more what the operations are planned for the quarter, we really don’t know. I think this is just the nature of the startup and the startup beast.

Mahavir Sanghavi - UBS

Got it. And then one last question, John. Just on you had publicly said before you were looking at one-third equity versus debt for the Natchez. Any updated thoughts on that from the financing standpoint? Thank you.

John Karnes

No. We don’t have any further information on that. No reason to think that’s changed. But as I mentioned earlier we really aren’t at liberty to really go into financing in detail at all right now.

Operator

Your next question comes from the line Brian Lee with Goldman Sachs.

Brian Lee - Goldman Sachs

I just had two, first on the recent RIN price volatility. You alluded to it on an earlier question. I'm just wondering if you have a specific pricing assumption that you’re using over the next 12 months for the A-RINs.

Fred Cannon

I think - we don’t know what’s in our model. We would see them continue to strengthen. John?

John Karnes

Right. No, that’s -- as you know we’re not in the trading business. So we do look at it. So what we’ve seen as the A-RINs currently are up about $0.40 from where we saw them in the fourth quarter. We see that as a good flow and maybe opportunity for increase. As you know we are having issues with the blendwall and people not being able to put more ethanol into the system to achieve their compliance. So these are competing more and more for RINs. We think that will have a minimum maintaining and perhaps increasing. What we’re more focused on is being able to begin a market for the C-RINs which we don’t think necessarily will always trade in tandem with their compliance value being A-RIN and the cellulosic waive of credit. But totally hope we see RIN I think for the foreseeable future or intermediate future we’ve been assuming -- looked at RINs we sold in the fourth quarter. We sold for around $2 and we think somewhere between $2 and $3 within that band is a good price range.

Brian Lee - Goldman Sachs

Okay, fair enough. That's helpful. And then my follow-up was on Natchez. I guess I was wondering since, John, you did mention you’re expecting Natchez to come on time and on budget, and in the past you’ve talked about a late 2014 start to commercial production; and you're also consistently saying that you would expect 60 to 90 days post-production at Columbus you’d be able to be in a position to secure financing for Natchez. So, given all of that, I feel like Natchez is no longer a late 2014 production start. Just any thoughts around that timing.

John Karnes

Yeah. It’s really going to be subject to the structure and the timing of the financing, but yeah. If you go back -- this is 2014 assume that we had an early ’13 groundbreaking which assumed either a Q4 2012 or an early Q1 financing. And so they’ve sensed that there is a delay and now we’re doing financing in Q2. That’s a quarter per quarter delay. If it’s in Q3 again you’re two quarters out. We’re doing everything we can as a management team to bring that in, but at the end of the day there’s only so much you can do on a project of the size of Natchez. So yeah, if we go -- if the financing occurs in 2013 I think you can tack at least a quarter on to what we had said before to be safe.

Operator

And that concludes today’s question-and-answer session. At this time, I’ll turn the conference over to Fred Cannon for any additional closing remarks.

Fred Cannon

We are proud of what we’ve accomplished and we certainly appreciate your continued support of KiOR and we look forward to updating you again in May. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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