Solazyme Looks to End a Mixed Week of IPOs on a High Note

| About: TerraVia Holdings, (TVIA)

With eight IPOs scheduled for this week, it started of with a bang when Russian Internet search giant Yandex (NASDAQ:YNDX) debuted on Teusday with an increase of 55% on their first day of trading (closing at $38.84, after pricing 52.2M shares at $25, well above the original range of $20-22). So far the rest of the week has had mixed results with 4 offerings all pricing below their original ranges: Active Networks (NYSE:ACTV) closed up 6% and Freescale Semiconductor (NYSE:FSL) closed up 1.8%, while Lone Pine Resources (LPR) closed down 3.5% and Spirit Airlines (NASDAQ:SAVE) closed down 3.75%. Two other offerings have been pulled or pushed back due to weak demand or as they like to put it "market conditions," Sabre Industries and Nobao Renewable Energy. That brings us to the final deal of the week, Solazyme Inc. (SZYM), which all indications point to a successful ending.

Solazyme priced an upsized offering of 10.975 million shares (vs 9.975M) at $18.00, above the indicated range of $15.00-17.00. Of the shares offered, 10.375M are primary or company shares and 600,000 are secondary shares being sold by selling shareholders, Jonathan Wolfson (CEO) and Harrison Dillon (President). Post offering Mr. Wolfson and Mr. Dillon will own a combined percentage of approximately 14.4%. At the midpoint of the range the market cap of the company is approximately $1.04 billion. Proceeds are expected to be used to fund research and development activities, working capital, and general corporate purposes. Morgan Stanley and Goldman Sachs are leading the offering.

Solazyme converts low cost plant sugars into high value renewable oils. Solazyme feeds sugars (like sugarcane and corn) to highly productive micro-algae in standard industrial fermentation equipment. Their oil can be tailor designed to specification, and can either enhance or replace the existing sources of oil (petroleum, plant oils, and animal fats). Their target markets represent over a $1.5T opportunity, including: Fuels (diesel and jet) with a TAM of over $800B, Chemicals with a TAM of over $600B, Nutritionals with a TAM of over $100B, and Skin and Personal Care with a TAM over $50B.

The company has been able to achieve fuel economics, by achieving commercial scale in 2007, and a descending cost curve, that now enables them to produce oil for less than $1000 /MT. This cost curve has declined from approx $10,000/MT in 2007. They have achieved linear performance at all scales, and have over 60 runs at 75,000 liter scale. From Jan 2010 to Feb 2011, they produced over 500k liters of oil. They now have commercial or commercial ready process in all markets. They believe that they have produced more non-ethanol, microbial-based fuels and oils than any other company in the world. From January 2010 through February 2011, they produced well over 500,000 liters (455 metric tons) of oil. The company plans to increase capacity to over 550k metric tons to support over $1B in revenue. They plan to have a Fuels and Chemicals facility (with an estimated cost of $90-110M) in production by 2013. The estimate is for 100k metric tons of production in 2013, growing to 500k metric tons by 2015.

The company has a site-specific commercial strategy in which they partner upstream at the site of sugar or corn mills. They bolt on an oil production facility at the site. The value proposition to mill owners is that they can dramatically increase product diversity into products such as food oil, diesel, oleochem and dielectric, rather than just ethanol and sugar. The payback period is just 4 years, and the mill can more than double their EBITDA.

Solazyme has development partnerships with numerous companies such as Bunge (NYSE:BG), Chevron (NYSE:CVX), Dow Chemical (NYSE:DOW), Ecopetrol (NYSE:EC), Qantas (OTCPK:QUBSF), and Unilever (NYSE:UL) (with Unilever and Bunge also investors in the company), as well as a partnership with the U.S. Navy. The company also has a joint venture with Roquette, called Solazyme Roquette Nutritionals, where Solazyme provides the technology and Roquette pays all development costs, while they split ownership 50/50.

While the company had revenue of only $38M in 2010, and does not expect to reach profitability until 2013, the ramp in revenues will be dramatic if Solazyme is able to achieve their production and capacity estimates. In the Fuels and Chemicals segment alone, they expect to grow from 1,300 metric tons in 2011 to 100k metric tons in 2013 and 500k metric tons in 2015. The company has current non-binding offtakes that exceed this planed 2015 capacity.

Two successful IPOs in the last eight months from renewable energy/biofuels companies Amyris (NASDAQ:AMRS) and Gevo (NASDAQ:GEVO) bodes well for the near term success of Solazyme. AMRS priced on 9/28/10 at $16.00 and is currently trading up approximately 84% at $29.52, and GEVO priced on 2/8/11 at $15.00 and is currently up 30% to $19.60. All three can at this stage be considered "story stocks," with a bet on future growth. However current investor appetite seems to be buying into their stories and the time is right for Solazyme to ride this wave.

Disclosure: I may initiate a long position in SZYM within the next 72 hours.