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Advanced biofuel companies, often thought of as second-generation biofuel companies, stand as a viable solution for the near future to the world's problematic dependence on oil. Such companies are often characterized by technology that can produce drop-in fuels utilizing today's infrastructure while deriving their product from unconventional non-food feedstocks such as switchgrass, wood chips, sugar cane stalks, or animal fats.

As a whole, biofuel companies are believed to be in the early- to mid-stage of their developments. The biggest detractor that overhangs their evolution stand in the large capital expenditure costs necessary to scale up production levels to a commercial level. Two such public companies facing this issue in their growth timelines are algae-based Solazyme (NASDAQ:SZYM) and wood chip converter KiOR (NASDAQ:KIOR), both of which are coming off the first year since their IPO.

Solazyme is in the business of producing renewable oils through the use of bioengineered algae strains and conventional fermentation equipment. Despite the label as a mere biofuel producer, the company also operates as a cosmetic manufacturer and food producer while also having plans to supply oils to manufacturers of health products and chemical companies. The company is able to produce drop-in oils on a commercial scale with test-proven gross margins at 30-60% for fuels & chemicals, 40-70% for nutritionals, and 60-80% for skin & personal care. The company is also able to tailor custom-made oils that exceed industry standards through its bioengineering process and duplicate existing oil replacements such as palm kernel oil, which is useful in many industries.

KiOR is a renewable fuels company that holds promising biomass-to-renewable fuel technology. Currently using scrap wood chips in a process that utilizes fluid catalytic cracking technology, a process that has been used for over 60 years in the oil refining industry, the company produces drop-in gasoline and diesel. The company is currently finalizing its first production facility capable of producing 11 million gallons of product annually, and is set to start producing in 2012. According to its S-1 filing, the company expects its per-unit unsubsidized production cost for gasoline and diesel blendstocks to equate to $1.8/gallon.

One of the most troubling factors for KiOR begins to show up in its heavy need for additional capital in order to build its future facilities. With losses expected to reach $100 million in 2012 and 2013, and a need to spend a possible $100 million more to get its initial production facilities online, the company may face considerable headwinds, considering its current cash on hand balance of $152 million as of its last quarter filing. KiOR's ability to raise more cash via debt or an equity offering might soon be put to the test.

While Solazyme faces similar issues and is slightly further behind in terms of coming online in a commercial sense, the company's approach to the issue has been more pragmatic. Instead of taking on the task alone, Solazyme has commenced its facility construction through joint venture agreements. The company already has arrangements to build a 50,000 metric ton facility with Roquette in France and a 100,000 metric ton facility with Bunge (NYSE:BG) in Brazil. Initial arrangements have already been made for an additional 300,000 metric tons of production with several undisclosed companies. In one of the most cost-effective maneuvers, and perhaps a testament to the promise of Solazyme's technology, the company was able to skirt 100% of the capital expenditure costs entirely to Roquette for its 50/50 joint venture. For comparison sake, a 50,000 metric ton facility would be slightly larger than KiOR's 11 Million gallon Columbus facility, which has cost the company $190 million.

In terms of partnerships, KiOR has made friends with some of the large companies. Catchlight Energy, which is a joint venture between oil giant Chevron (NYSE:CVX) and forest product-maker Weyerhaeuser (NYSE:WY), signed an offtake and feedstock agreement with the company. Kior also signed an arrangement with a large end-user in FedEx (NYSE:FDX), with its hungry fleet of fuel eating trucks. Yet Solazyme has also found large partners in companies such as Chevron, Roquette, Dow Chemicals (NYSE:DOW), Unilever (NYSE:UL), Sephora, United Continental Airlines (NYSE:UAL), Quantas Airways (QUBSF.PK), Bunge, Honeywell (NYSE:HON), and the U.S. Navy, to name a few.

One of the determining factors that truly differentiates the two companies, however, lies in Solazyme's flexibility to produce multiple products. As a company capable of customizing its oil profiles, the company is able to not only open multiple markets, but also make entire barrels of specific cuts of a barrel of crude oil. For example, instead of a 10% yield of diesel, that a typical barrel of oil might hold, Solazyme can create a barrel consisting of a 90% yield of just diesel, a more valuable cut of the barrel.

Likewise, the lack of KiOR's ability to expand into multiple industries only serves to its own loss. One of the reasons that Solazyme is concentrating on its other industries in this period of growth lies in the fact that the fuels market tends to be a low-margin industry and is entirely linked to the price of fuel. As a result, KiOR is struggling to bring online production capacity into an industry that already yields relatively low margins. Nevertheless, out of the these two companies, KiOR currently offers a lower cost of production and maintains a head start in terms of bringing such production online. This is still an advantage worthy of much consideration.

Source: A Tale Of 2 Biofuel Companies: Solazyme Vs. KiOR