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Cellulosic ethanol developers such as Verenium Corp. (VRNM), Poet Energy (private) and Dupont’s Danisco Cellulosic Ethanol (DD) have reported some development progress. Poet's management has even considered an initial public offer of their company’s stock. Unfortunately, stock prices in the sector have failed to follow along and Poet remains private.

The problem might be that the science has not yet caught up with the public’s resolve to use renewable fuels. There are several different processes still under development to turn fibrous organic material into biofuel: acid hydrolysis, thermochemical conversion, biochemical conversion, consolidated bioprocessing, and combinations of these three.

So far all these processes are expensive, leaving cellulosic ethanol without much appeal to investors at current crude oil prices. That has not stopped Verenium, which in moving forward with development and just restructured its balance sheet with existing convertible note holders. The restructure can be taken two ways, if you assume existing investors have been given a glimpse into the company’s technology portfolio: existing investors are trying to salvage a losing situation OR existing investors see that success is right around the corner and want to support the company in the final stretch.

Nor have the development challenges intimidated others from jumping into the race. BlueFire Ethanol Fuels (OTCQB:BFRE) is developing processes to turn municipal waste into sugars for fermentation into ethanol. It has ample municipal waste supplies lined up. The trick will be getting some kind of fuel to come out the other end at acceptable costs. The stock still trades much like an option on the technology, which could make it a play for investors with high risk tolerance.

A share of CleanTech Biofuels, Inc. (CLTH.OB) is “another cellulosic ethanol option.” CleanTech has also got its eye on municipal waste, which in its abundance makes sense the processing technology notwithstanding! These days CleanTech is using garbage from Chicago to produce small quantities of biomass feedstock for testing by Colorado-based GeoSynFuels.

Accredited investors might have a chance to take a position in a private cellulosic ethanol developer. There are many including Iogen, Coskata, Range Fuels, Mascama, ZeaChem, and Qteros (formerly SunEthanol).

Yet another chance to get behind the sector: Abengoa BioEnergy, SA based in Spain. The parent’s stock trades as an ADR in the U.S. on the Pink Sheets under the symbol OTCPK:ABGOF or under the symbol ABG on the Madrid exchange. Technologically, Abengoa may be further ahead of U.S. cellulosic ethanol producers and the European market from an economic standpoint since Europeans may be more disposed to the switch to biofuel from fossil fuels.

If you do not want to invest directly in the producers because of feedstock or transport risk, consider an equipment supplier. SunOpta’s (STKL) Bioprocess Group provides equipment and process solutions for the biomass conversion industry and claims “the only continuous, industrially proven process in the world that can pre-treat biomass at the temperatures and pressures required for subsequent enzymatic hydrolysis for the production of fermentable sugars.” The forward PE for STLK is 15.2 times and trade volumes are strong.

Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Source: How to Invest in Cellulosic Ethanol