Clean Coal Company Climbs: Is There Substance to the Synthesis Energy Story?

Mar.15.11 | About: Synthesis Energy (SYMX)

Synthesis Energy Systems (Nasdaq: SYMX) metamorphed 21% Monday, but this is a penny stock, so it only took a $0.31 gain to mark the impressive change. The stock gap-opened higher before trading like a roller coaster ride through the day. It seems the stock is a trader favorite this month, just looking at the last five days record. Yet, this was a dead story until early March, when it suddenly got hot.

Synthesis Energy Systems is a coal and biomass gasification company that claims advantages in cost of production. The company also reports flexibility in the uses of its end product, and claims that low cost, low rank coal and biomass can be input in its fuel production. It probably helps that the company includes China as one of its target markets. These types of companies also benefit from the hit taken by nuclear energy this week, and they do well when important oil producing nations are engulfed in chaos.

The movement of the stock sure has me interested, but it does not mean there is substance to the company in and of itself. She's like a pretty dancer you like to watch and maybe get to know a little, but not the kind of girl you marry, at least not without major due diligence.

The company presented at a conference in Paris at the start of the month, and must have caught the interest of some capital. Volume was 5.5X normal Monday, and clearly there was a bias to the buy side. Over the past few years, SES entered into capital intensive plant production to create proving centers (or plants). It is now engaging in licensing, which it says will allow faster growth. We agree that it should, but it is also due to necessity, due to capital constraints. That said, if the technology is as effective as the corporate materials indicate, then perhaps this company can become an important player in clean coal.

Synthesis Energy has been a money burner through its fiscal 2010 (ended June), and I believe it will need to raise some more capital while it creates new revenue streams. We would value it by its price-to-opportunity, versus price-to-sales or price-to-book, or we would do our best to estimate the value of the company's free cash flow potential. The process of estimating this would take a significant amount of time (if done right), so forgive your author for not engaging in the construction of a full blown DCF model now. At this point, I simply want to define for you why I think the stock has been so active of late and whether it should present opportunity for traders in the days ahead.

The company surely gains capital eyes while pressure builds on other energy sources, and as oil rises above $100 a barrel and gasoline above $3.50. Given what seems an important value add provided by the company's processes, turning bad coal into good energy, it would seem SYMX should find the capital it needs to grow into a profitable company. Thus, the recent presentation was well-timed and the company would be well-advised to keep to the money circuit while the iron is hot. There should be opportunity to raise funds in the capital markets now. We will keep an eye on the development of the company, which is a highly speculative play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.