Solazyme: Filling The Gap Between Innovation And Sustainability

| About: TerraVia Holdings, (TVIA)

Renewable oils and bioproducts innovator, Solazyme (SZYM), continues to progress as it remains focused on its transition towards commercial development. With two large production facilities expected to come online in the coming months, Solazyme has now begun to reveal commercial agreements that further demonstrate the quality of its partnerships.

In early August, Solazyme announced a multi-year arrangement with Sasol O&S, a leading surfactant subsidiary of the $30 billion giant, Sasol Ltd. (SSL). Two weeks ago, Solazyme proved its ability to convert long-term relationships as consumer products giant Unilever (UL) entered into an offtake agreement with Solazyme after five years of joint development. Most recently, Solazyme signed a commercial supply agreement with Goulston Technologies Inc., the industry leader in textile lubricants.

Surprisingly, there remains one common trend found in each of these agreements. It appears that each partner expects to expand their relationship with Solazyme. Sasol is investigating a broad collaboration with Solazyme. Unilever viewed its initial agreement as "just the beginning" even as it continues to support multiple projects with Solazyme. In the latest announcement, even Goulston explicitly stated that it plans to "further expand the use of this breakthrough technology." Such universal support across multiple industries remains a positive indicator of the things to come for the Solazyme's novel sugar-to-oil technology platform.

SZYM Chart
(Click to enlarge)

SZYM data by YCharts

Addressing The Need For Innovation

A look at Solazyme's latest agreement with Goulston demonstrates the growing need for innovative solutions in a rather plain industry. Fiber lubricants reduce surface drag and improve abrasion resistance during textile manufacturing. They also add softness and provide greater resiliency. As a result, fiber lubricants enhance the overall efficiency of the manufacturing process. However, in an article found here on Goulston's website, the industry also faces the following challenge:

"Formulators are limited to only very few classes of surfactants than can provide both the lower effective surface tensions required for high speeds and the thermal stability properties needed for high processing temperatures."

Perhaps it is no surprise then that Solazyme's VP of Sales, Rob Evans, had the following to say in the company's press release:

"Solazyme's renewable Tailored™ algal oils are able to provide outstanding performance and a more sustainable solution with better lubrication, surface tension and viscosity index, plus enhanced stability at elevated temperature, pressure and/or speed, making them ideal for technical applications like textile finishes and for the general lubricants market."

(Click to enlarge)

Solazyme's oils provide a new alternative to the existing market. The company's tailored oils can be custom designed to fit the ideal profile of a particular product. In the case of Goulston, Solazyme offered an oil that can meet the requirements of lowering surface tension while enduring increased temperatures for high processing. Yet in doing so, Solazyme also provided a sustainable solution for Goulston. Goulston's Chief Technology Officer, Srinivasan Ranganathan, was clear in asserting this as he stated the following in the same press release:

"In addition, our goal is to provide the industry with the highest performance lubricants with the lowest environmental impact. We are committed to using sustainable raw materials wherever possible and we are excited to announce the immediate introduction of high-performance textile finishes based on Solazyme algal oils."

Why this matters can be summarized in a 2009 article found here. In this press release authored by Ranganathan himself, Ranganathan states that there is a need for more sustainable fiber lubricants. He notes that this is due to the generally short lifespan of functionality of fiber lubricants on the fiber surface. Once a fabric or carpet is made, the lubricant is typically no longer required and becomes part of the waste stream in the dyeing or finishing processes.

The short lifespan of the lubricants and the growing demand for textiles has resulted in a rapidly growing industry. In the 2009 article it was estimated that over 600 million pounds of fiber lubricants are used each year. However, in the latest joint announcement with Solazyme, that market had now grown to more than 1 billion pounds annually. Despite its steady 70-year history in lubricants, Goulston is showing that there was a 67% increase in market size over the last 4 years.

The Hidden Benefits In Cost Efficiencies

The rapid growth of the fiber lubricant market helps to illustrate the innate advantage that Solazyme offers to its clients as they attempt to secure renewable supply lines. Simply put, Solazyme offers sustainable solutions in a quickly developing world. Resource management has become an important part of capturing process efficiencies, and ultimately cost savings. Rather than having to rely on crude oil from Saudi Arabia, palm oil from Malaysia, or cocoa butter from Africa, companies can now turn to Solazyme in order to secure locally-produced replacements harvested every week out of the year within the United States.

One aspect of the company's appeal to its clients will inherently come down to these hidden factors unable to be easily calculated. Sales figures may not necessarily illustrate the entire value of a transaction when they neglect the costs saved by the partner company. To give a hypothetical example let us consider the market of paper, a product able to be made by Solazyme utilizing the leftover algae after extracting its oil. As the company can make paper from its waste biomass, let us assume that it's cost benefits is similar to producing recycled paper.

At a 80% yield, Solazyme can produce roughly 20,000 metric tons [MT] of waste biomass at its Moema facility with a 100,000 MT nameplate capacity. According to these recycling facts found here, one ton of recycled paper saves 463 gallons of oil, 7000 gallons of water, reduces 850 pounds of carbon dioxide emissions, while also saving 17 trees. This suggests that the company's waste product produced at the Moema facility can theoretically save a paper producer roughly 35,000 MT of crude oil, 154.3 million gallons of water, 18.7 million pounds of carbon dioxide emissions, and 340,000 trees if provided for free. Yet there is value in such sustainability, and it remains reasonable to expect that Solazyme will share in its worth in order to further bring down its production costs.

The value of the company's co-products are not the only unknown benefit to date. There are gained efficiencies in how partner companies allocate their capital, there is increased control over production quality, and there are logistical gains found in reduced transportation costs to name a few. Although these benefits remain unknown to investors, it is clear that partners continue to attribute them to the unique technology platform offered by Solazyme.

A Look At The Company

Solazyme now trades with a market capitalization of $692 million at its last price of $11.11 on October 8. The company now supports a high price-to-sales ratio of 19.66 and price-to-book ratio of 4.73. However, these ratios neglect the rapid growth now underway. Solazyme remains a promising development company now transitioning to commercial operations. The latest sales figures fail to reflect the upcoming growth in production capability. This is expected to rise from 1,800 MT to over 120,000 MT by 2014. Likewise, the Solazyme's book value neglects the full value of the company's intellectual property, solid partnerships, and leadership position in this niche market.

Although more akin to a developing biotechnology company, Solazyme continues to be compared against a weak industry group focused on advanced biofuels. Nevertheless, the company's outlook is one defined by much growth. Analysts estimate that Solazyme will generate $53 million in revenue for 2013. This number sharply increases to $232 million in 2014 as the company's new facilities come online.


Solazyme continues to attract leading partners in niche industries. Investors should note that the company is filling a large gap between innovation and sustainability. Apart from targeting markets with higher margins, Solazyme also appears to be planting a foundation into markets experiencing rapid growth. It remains a telling sign that the Solazyme's partners are interested in expanding their relationship with the company. Such partnerships continue to express the long-term value of Solazyme's technology.

Disclosure: I am long SZYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.