Synthesis Energy Systems (NASDAQ:SYMX) is a "green energy" company that has never made a quarterly profit in over seven years. Last quarter, it laughably only made $1.3 million in revenues. Yet, management continually talks a big game to keep bringing in new investors to buy the stock so it doesn't get delisted from the Nasdaq. We at White Diamond Research advise investors to judge the company by its revenues, NOT by what management says or by "China deals" that usually don't work out. In the last couple of earnings calls, management has showed excitement about "big deals" they are working on. They do this to boost the stock price. But we ask management, why is NOW the time for technology to take off? You couldn't make any money for the past seven years, when energy prices were high, yet now, miraculously, you're going to become successful? Natural gas and oil are at multi-year low prices, and there's no reason for anyone to pay attention to SYMX technology at this point.
SYMX is very similar to another "green energy" company, Capstone Turbine (NASDAQ:CPST), a manufacturer and seller of microturbines. CPST management has also talked a big game over the years and have enticed many clueless investors. (Here is an article explaining CPST's failed technology.) But it never makes any money, and likely never will. On April 19, 2016, CPST issued stock and warrants and the stock fell 25% on that day, and it has continuously fallen lower since then. Like CPST, SYMX is also going to do an equity raise soon, as the company said it will do one in its Q415 earnings call, and on April 15, 2016, filed a $75 million securities shelf.
SYMX gets its revenues from its gasification technology called "syngas" through the burning of cheap coal. This syngas is then turned into methanol through with the help of its JV partners by combining it with coke oven gas. But because methanol prices are so low right now, the company's JV partners aren't making the methanol from the syngas. One of its JV partners, Zhao Zhuong (ZZ), idled its coke oven in Q415. This substantially decreased SYMX's revenue for the past two quarters. In the quarter ended March 31, 2016, the company generated only $1.3 million in revenues, and it only made $818K in revenues the quarter before that.
As SYMX former CEO and now board member Robert Rigdon said in the fiscal Q216 earnings call, "... unfortunately methanol tends to track oil price."
Lately, SYMX has put out a barrage of PRs in order to boost the stock and get ready for an equity raise. In the latest fiscal Q316 earnings call, the company's CEO, DeLome Fair, gushed about all the deals they are working on. However, when asked by analyst for a timeline of when the deals will happen, she didn't have any answers.
In their earnings calls, management said syngas is a good energy alternative for China rather than importing oil, natural gas and coal. However, those commodities are at the lowest price in years, so why would now be an opportune time for this technology? The time of expensive energy prices has passed. SYMX had 7 years to try to make money with its "clean coal" syngas system, but couldn't. With today's low oil and natural gas prices, it is a very unprofitable time for the company.
Synthesis Energy Background: Why Syngas Isn't Economically Viable
SYMX is a US company based in Houston, Texas. However, there is no interest at all in its syngas technology in the United States. It has no business in the US, and has to look for business in China and third-world countries in Asia.
Right now, the only end product that SYMX's technology creates is methanol. The process is inefficient. It goes from burning coal to form syngas, then the syngas is formed into another type of energy, in this case methanol, and then the methanol is sold and used by the end party. That's three costly steps in the process, as opposed to just one step in the traditional energy generation process of, for example, burning coal or natural gas.
The company claims its syngas replaces "expensive natural gas". But natural gas is cheaper today than it has been in a long time. Natural gas by itself is also considered a clean energy.
Bulls say SYMX has efficient technology because the company takes a cheap input (low-quality coal) and create a high-value output (syngas). But if it were valuable, then everyone would be doing it all over the world. Margins in the commodities business are razor-thin, so if there was any way to have an edge, energy companies would do it.
Synthesis Energy Investors Are Showing Desperation
In the latest fiscal Q216 earnings call on February 11, 2016, some analysts showed desperation for their clients. SYMX was trading at $0.60 per share at the time and needed a boost to take its stock above $1 in order to satisfy Nasdaq compliance.
In the earnings call, an "Unidentified Analyst" asked:
I would like to ask you what you're going to be doing to regain NASDAQ compliance because the stock prices gotten hammered and being on the retail side very, very sensitive to my clients, ownership and their concern that the stock price keeps slipping and they were going lose our NASDAQ compliance?
Are there anything that we can talk about in terms of IR releases, in terms of some of the projects that you have, that you are working on it might help the stock price and gives potential shareholders more hope that we are at the tipping point of changing the world and here's why?"
There's a couple things to take from the above-mentioned "Unidentified Analyst's" question. First, he says his clients are "retail". This makes sense, because most professional money managers aren't investing their money in SYMX as they know there's little value in the technology. Second, he basically begged management to put out PRs to boost the stock price. He knows the fundamentals of the company alone won't push up the stock, so they need to pump it up. Without being too obvious about it, the former CEO and now board director, Robert Rigdon, answered in the affirmative that they would be putting out PRs. And indeed, they have been putting them out since that earnings call.
Ever since mid-2011, SYMX has traded below $2 and often below $1 per share. See the 5-year chart here.
At this point, with all the cash burn over the years, it's unlikely that the stock will ever see $1.50, and we believe it will likely slide back down to below $0.50 later this year.
Chinese Deal Newsflow Can't Be Trusted - Especially From Synthesis Energy
Any deals SYMX makes in China can't be believed until the cash hits the balance sheet. Don't assume the company will ever receive any money from any deal. Its last big China deal pumped the stock up in 2011. But it turned out to be a sham and never went through. SYMX has a history of dealing with shady companies who might sign a contract but don't come up with the funds.
The following chart shows the SYMX share price rallied 300% on the news in 2011. Then, the stock faded into 2012 as investors began to realize the deal was BS.
The following three PRs show the timeline of how the fake China deal was announced and then never happened.
This PR from March 31, 2011 says:
"Synthesis Energy Systems announced today that it has signed an agreement with China Energy Industry Holding Group Co., Limited ("China Energy"), for a cash investment of approximately US$83.8 million to support the Company's business strategy in China, including project development and investment".
This PR came 8 months after the first one, on December 7, 2011, and it says:
"While we cannot currently predict the final timing of completing the government approvals process and the closing of this transaction, based on our active discussions with ZJX and Yima we remain confident that the agreement with China Energy to make this substantial strategic equity investment into SES will close."
This PR from Apr 3, 2012 says:
"After speaking with our partners and consistent with the terms of our agreement, we have decided that our Share Purchase Agreement with ZJX/China Energy will remain in effect and that we will continue to negotiate with the objective of completing our agreement at the earliest possible date."
After that last one, there were no more PRs from SYMX regarding its deal with China Energy. It was clear the deal was off and SYMX shareholders were just strung along. We don't know the motivation for announcing the deal in the first place, or what kind of behind-the-scene deals were made.
Synthesis Energy Has Never Had A Profitable Quarter
Taking a look at SYMX earnings over the years, it clearly isn't a company that is "changing the world", as the "Unidentified Analyst" said in the earnings call. The following are select financials of the company's fiscal quarters since Q1 2009 up until the latest fiscal quarter Q3 2016.
As shown in the above financials, SYMX has never had a profitable quarter for over 7 years. It also has had very few gross profits booked in a quarter. The last gross profit booked was in Q214. If a company isn't at least making a gross profit, then it's a hobby, not a business!
SYMX only made a gross profit in Q214, because oil, and therefore methanol, was at a high price. Mid-2014 was when oil started taking a tumble. The following is a five-year chart comparing historical oil and methanol prices:
As shown in the above chart and stated in the earnings call, lower oil prices mean lower methanol prices. It's unlikely that either oil or methanol will ever get back to 2014 levels, at least for the next ten years.
Management's Language Revealed It Will Carry Out An Equity Raise For Projects
Management needs an excuse to raise money. That's why they first put out a PR about an upcoming project. This is evident from management's language in the fiscal Q216 earnings call.
Asked analyst Robert Smith:
"I'm wondering how you're looking at 2016 are you fully capable of going through the year without an equity dilution?"
Answered Robert Rigdon:
"So Robert yes if you look at our financials and you look at our run rates you can see that we are fully capable of doing that. But also you sort of touched on the point that I'd like to bring some more color to and that is we're talking about getting into equity projects. So we're not looking at tapping into the funds that we have on the balance sheet to-date to do that, and I want to make sure that comes across clear."
What Mr. Rigdon says above is, SYMX has enough cash to last the rest of the year for current operations. However, the company isn't going to use the funds it has now for new projects. It will need to raise money to fund those. That's why it has put out PRs on projects in order to have the excuse to carry out an equity raise.
SYMX's first hype PR since the fiscal Q216 earnings call was sent on March 28, 2015. It announced that SYMX and China Environment State Investment Co. (CESI) will be undertaking 20 Syngas projects over the next five years. Looking at SYMX's financial and deal track record, it's likely none of these projects will ever come to fruition.
The second hype PR was sent on March 30, 2016. It says that SYMX and its Yima JV plant achieved "formal acceptance", and that it "exceeded all performance targets". However, the PR fails to mention what the performance targets were and who awarded the plant formal acceptance. Furthermore, it says that the plant has the "potential" to be profitable on an EBITDA basis, not that the plant will be profitable. The Yima plant is currently idle because methanol prices are low.
Then, on April 20, 2016, SYMX announced a deal with a company called Suzhou Tianwo Technology (Thvow). This is a small deal, a $24.8 million contract, with a small Chinese company. It was for the sale of syngas equipment. We don't know where the deal will go from here, how long it will take to complete, or if it was just BS.
Why CESI Likely Won't Be Able To Get Chinese Government Funding For New Plants
SYMX released a PR on March 28, 2016 about partnering with CESI. That caused the stock to rise 40% on the day of the PR release. However, this partner was actually already known, and the news should have been already priced into the stock.
From the fiscal Q216 earnings call:
"We have already secured a Chinese partner … who intends to participate with us and approximately 50% of the equity for these projects."
"Our new Beijing-based China partner that Robert mentioned earlier with regards to the new syngas project for equity participation also had very strong objectives to pursue clean power project with SES technology."
The highlights of the proposed CESI deal are:
- They plan to build 20 more "projects" over the next 20 years. These projects are plants using SYMX syngas technology.
- Each project is expected to cost between $75 million and $400 million.
- Both sides will seek funds for the projects. SYMX's subsidiary, SES, will look for international funds through selling equity. CESI will secure project debt financing.
- Each project will be owned 49% by SYMX and 51% by CESI.
With methanol prices where they are now, and syngas historically being uneconomical, it will be very hard for SYMX to raise the money in China. Getting project financing used to be an easy way to get money from China local governments up until the recent economic downturn in the country. In the past, getting government project financing was like "you scratch my back, I'll scratch yours". A local government official would lend a company financing, and in return, that company would buy the official a new house. Now, China is drowning in debt and is diligent against corruption. For example, this Chinese official recently received a 12-year prison sentence for receiving bribes. Many solar and wind energy companies are still asking local governments for project financing. But the Chinese governments are all tapped out.
Why would a local government loan CSEI and SYMX $75-400 million for a syngas plant? It's an unproven and unprofitable system. It would be one thing to build a natural gas plant, for example. The costs and return from natural gas can be calculated easily. But a syngas plant would be a huge risk.
Furthermore, needing to ask the government for project funds shows lack of confidence. A company should not rely on the government for help. It would be a more legitimate technology if, for example, a Chinese coal company announced that it's changing its technology to syngas and wants to partner with SYMX. That would be a true market participant vouching for the technology, versus CESI, which is not even an energy company, just an environmental fund, attempting to get money from Chinese local governments. Who's going to be the big sucker to put up $75-400 million for a likely unprofitable project?
The number of projects that CESI claims they will make, 20 in five years, is likely a number that they pulled out of thin air. There aren't many power plants being built in China right now. They used to build them all the time without thinking about safety, now they are cracking down. When they built them too hastily, accidents happened. For example, check out the live taping of the enormous explosion in Tianjin in August 2015.
Synthesis Energy Already Has Three Joint Ventures Producing Way Below Capacity - More Projects Don't Make Sense
As of today, SYMX has three joint ventures. These are described in the company's latest 10-K.
- Zao Zhuong Joint Venture
ZZ began producing and selling methanol with SYMX in November 2013. It produces at a relatively small capacity, around 50K metric tons of ethanol in the year ended 6/30/15, which generated $15 million in revenue. It idled its coke oven last quarter and only produced $0.7 million in revenue.
- Yima Joint Venture
This venture is owned 25% by SYMX. It was intended to be designed to be able to deploy the syngas technology at a much larger scale than the ZZ plant. It has been shut down since April 2015 and won't regain operations until methanol prices rise.
- Tianwo-SES Joint Venture
This joint venture markets and provides equipment for SYMX's syngas technology. Its intent is to become the leading provider of syngas equipment for the Tianwo-SES Joint Venture territory, which is China, Indonesia, the Philippines, Vietnam, Mongolia, and Malaysia.
All of these joint ventures are operating below capacity now that methanol is low. They are just costing SYMX idle fees. Therefore, there is no reason to fund new projects at this point. That will just increase the company's losses and cash burn.
Because SYMX's syngas is only used to make methanol, the company is at the mercy of methanol prices. It has concentrated risk in that commodity. SYMX's potential projects in other businesses, like power, steel, and renewables, are all in the beginning, negotiation stages and may never come to fruition.
Why Does John Paulson Have A Stake In Synthesis Energy?
Billionaire investor John Paulson's fund owns a 10 million share stake, or about 11% of outstanding shares, in SYMX. We don't know why Mr. Paulson took a position, but it's not a significant hurdle to our thesis. First, his fund manages about $17 billion. So one $10 million position is only 0.05% of the total fund. Very insignificant. We believe Paulson is a good money manager, but he doesn't have the best track record for picking individual stocks. Over the past three years, his fund, Paulson & Co., has an annualized return of -0.24%. It is ranked only 190 out of 213 hedge funds, according to tipranks.com, and is rated less than one star. He has also made some bad investments in China, such as the Sino-Forest fraud.
Frequent Auditor Changes And Recent CEO Change Don't Look Good
The CEO, Robert Rigdon, left in February 2016. He was replaced by DeLome Fair. The company didn't say why Mr. Rigdon was replaced, but it's likely because shareholders got tired of him failing to bring SYMX to profitability after so much optimism year after year. The company needed a new face in order to create fresh new optimism with investors. Of course, putting a new face on an inefficient energy generation system doesn't make it any better. Mr. Rigdon is now on the board of directors, and is still getting paid a hefty sum. As stated in an SEC filing:
"Robert Rigdon entered into a consulting agreement effective February 15, 2016 with the Company for certain transition services to assist Ms. Fair and certain ongoing project assistance. The agreement is for a one year term with automatic renewal for additional one year terms unless one party terminates the agreement. Mr. Rigdon receives a monthly fee of $15,000 for transition services and $10,000 for other ongoing services."
The following are the changes in auditors for SYMX over the years:
While this doesn't guarantee accounting shenanigans, it is fishy for a company to switch auditors so many times - three in the past four years. It got rid of PricewaterhouseCoopers and replaced them with auditors that aren't as reputable.
With an inefficient syngas process, SYMX is going through a financial crunch. The company didn't make money when methanol prices were high, and it certainly won't make money now that they are low. But since it reached a low point earlier this year at $0.60 per share, the company issued hype PRs to temporarily boost the stock price in order to maintain Nasdaq compliance. The creation of new JV projects in China doesn't make logical or economic sense. Due to SYMX's, and China's, history, investors shouldn't trust the deal newsflow.
The dump of SYMX stock will likely commence when the company does its upcoming equity raise, which it has said it'll do and has already filed a mixed security shelf. We believe now is a good opportunity to short SYMX before it fades to $0.50 per share. We suggest holding a short position until the company's created hype wears off and economic reality sets in.
Note: We tried contacting the SYMX IR twice for their feedback on this report. The company has not returned either of our calls.
Additional disclosure: White Diamond Research is not a registered financial advisor and does not purport to provide investment advice regarding decisions to buy, sell or hold any security. White Diamond Research currently holds a short interest in SYMX and during the past 12 months has shared fundamental and/or technical research with investors who hold a short position in the stock. White Diamond Research may choose to transact in securities of one or more companies mentioned within this article within the next 72 hours. Before making any decision to buy, sell or hold any security mentioned in this article, investors should consult with their financial adviser. White Diamond Research has relied upon publicly available information gathered from sources, which are believed to be reliable and has included links to various sources of information within this article. However, while the author believes these sources to be reliable, the author provides no guarantee either expressly or implied.
Disclosure: I am/we are short SYMX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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