Seeking Alpha
, IPOpremium (659 clicks)
Value, IPOs, long only
Profile| Send Message|
( followers)  

Based in Pasadena, Texas KiOR (KIOR) is scheduling a $230 million IPO with a market capitalization for $2 billion at the price range mid-point of $20 for Friday, June 24, 2011. The full IPO calendar includes five IPOs.

SUMMARY -- KIOR is a biomass company that can make transportation fuel oil out of forest-based feedstocks. KIOR's production equivalent price to a gallon of ethanol is less than $1.10 per gallon, under current raw material prices.

Federal Express (FDX) has contracted buy a portion of the output from the first full-on commercial plant, along with Hunt Refining and Catchlight Express, a 50-50 joint venture between Chevron (CVX) and Weyerhauser (WY).

"Kior processes wood products to make biofuels that can be converted at standard refineries into gasoline, diesel or jet fuel. The $190 million Columbus facility is expected to produce about 11 million gallons (42 million liters) a year, and successive plants may be larger. KIOR is planning to build other plants in Mississippi, Texas and Georgia that may cost $350 million each." (Bloomberg, June 8, 2011)

However, KIOR is projecting operating losses into 2013.

LEAD VENTURE CAPITALIST WON'T SELL -- "Khosla Ventures II, L.P. has agreed not to sell any of the 46,259,738 shares of our common stock that it beneficially owns, representing approximately 47% of our outstanding common stock immediately prior to this offering, for a period of 360 days after the date of this prospectus." (Second page in the June 10, S-1)

But KIOR may suffer a business dilution from a "Letter of Intent with Khosla Ventures." In May 2011, KIOR entered into a non-binding letter of intent with Khosla Ventures with respect to the discussion and negotiation of a potential transaction in which Khosla Ventures would build, own and operate commercial production facilities that incorporate KIOR's BFCC process.

The terms contemplate that, beginning in 2015, Khosla Ventures would be permitted to construct a limited number of commercial production facilities using KIOR's plant design, operation and related technologies. In addition to proceeds from the sale of catalyst, KIOR would share a portion of the revenue generated by these facilities above a hurdle rate of return for Khosla Ventures. (S-1 page 119)

VALUATION -- Here are four criteria for evaluating companies that are focused on renewables, especially on biomass:

  1. Existing markets;
  2. Proven technologies;
  3. Market size and opportunity; and
  4. Accurate financial forecast potential.

KIOR scores well in each category.

KIOR is tightly focused on producing oil from biomass at a relatively low cost and is in the same general category as Solazyme (SZYM), Amyris (AMRS), and Gevo (GEVO).

KIOR's market capitalization is about 60% more than Solazyme's and Amryis' and both SZYM and AMRS have revenues and, like KIOR, have strong strategic partnerships which are expected to generate significant revenue.

Based on price-to-book value KIOR would sell for the highest price-to-book value of the group: The values are: KIOR, 6.6; SZYM, 5.2; AMRS, 4.6; GEVO, 3.4.

If a KIOR investor wants to participate in the renewable section, it seems prudent to also consider Solazyme, at least. At current prices we like both SZYM and KIOR, although there may not be a rush to buy either until the market levels out. Also, as with any new technology process, there is not a 100% guarantee that plant production can be scaled up without hickups and problems. (KIOR Valuation Metrics)

THREE RECENT IPOs IN THE RENEWABLES SEGMENT

  • Solazyme engages in the production of renewable oil. Its proprietary technology transforms a range of plant-based sugars into oils. (Pre-IPO Solazyme report)
  • Amyris is an integrated renewable products company, offers renewable compounds for a variety of markets. (Pre-IPO Amryis report)
  • Gevo is a development stage renewable chemicals and biofuels company, focuses on the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. (Pre-IPO GEVO report)

BUSINESS -- KIOR is a "next-generation renewable fuels company" with a production cost advantage and turns feedstock wood into transportation fuel. KIOR uses a proprietary biomass fluid catalytic cracking to reduce direct lifecycle greenhouse gas emissions by over 80% compared to the petroleum-based fuels they displace.

THREE SIGNED CUSTOMERS

FEEDSTOCK SUPPY AGREEMENT -- KiOR signs agreement with Catchlight Energy for biofuels feedstocks, June 9, 2011.

"KiOR, a next-generation renewable fuels company, and Catchlight Energy have signed a feedstock supply agreement which will see Catchlight Energy provide forestry-based feedstocks to KiOR for commercial renewable fuel production. Catchlight Energy, a company that is a 50/50 joint venture between Chevron and Weyerhaeuser, will provide the feedstocks to the KiOR fuel facility located in Columbus, Mississippi, U.S.

"Securing a feedstock supply agreement for our first commercial facility in Columbus is an important milestone,' says Fred Cannon, KiOR's president and CEO. ‘We are pleased with the progress in securing contracts for the facility's feedstock supply and for the offtake of the facility's output of renewable fuel blendstocks."

The agreement follows Catchlight Energy's decision to provide RIN certification of the products of cellulosic biofuels under the US Renewable Fuel Standard, to purchase petrol and diesel fuel blendstocks from KiOR. (Biofuels-news, June 9, 2011)

LOSSES EXPECTED -- KIOR expects to continue to incur operating losses through at least 2013 as KIOR continues into the commercialization stage of the business.

TECHNOLOGY -- KIOR believes its unsubsidized production cost equates to less than $1.10 per gallon of ethanol equivalent.

PRODUCTION -- . KIOR's initial-scale commercial production facility will be financed in part through a $75 million interest-free loan from the Mississippi Development Authority.

KIOR plans to build, own and operate its commercial production facilities in the United States. KIOR began constructing a 500 BDT per day initial-scale commercial production facility in Columbus, Mississippi in the first quarter of 2011, with production expected to begin in the second half of 2012. KIOR intends to construct a 1,500 BDT per day standard commercial production facilities, which are designed to have three times the capacity of its initial-scale commercial production facility, beginning in the third quarter of 2012 with the first planned facility in Newton, Mississippi. (S-1 page 80)

The $190 million Columbus facility is expected to produce about 11 million gallons (42 million liters) a year, and successive plants may be larger. KIOR is planning to build other plants in Mississippi, Texas and Georgia that may cost $350 million each.

PILOT FACILITIES -- After an initial research and development effort, KIOR successfully converted biomass into a renewable crude oil in a laboratory program that validated the technical feasibility of the process.

Building on the success of this program, KIOR constructed a pilot unit outside of Houston, Texas to continue developing and validating our technology. This pilot unit has amassed over 9,000 hours of operation and evaluated more than 250 catalyst systems.

INTELLECTUAL PROPERTY -- As of June 9, 2011, KIOR had 70 pending original patent application families containing over 2,000 pending claims. These intellectual property claims cover different aspects of KIOR's technology, and many of them have been or will be filed both in the United States and in various foreign jurisdictions.

USE OF PROCEEDS -- KIOR intends to sell 11.5 million shares to net $214 million. The proceeds are allocated to fund a portion of the capital expenditures, including front-end engineering and procurement services and long-lead equipment, for KIOR's planned first standard commercial production facility in Newton, Mississippi.

Source: IPO Pick of the Week: KiOR