BlueFire Ethanol Fuels: Converting Garbage Into Profits

Feb.25.08 | About: BlueFire Renewables, (BFRE)

BlueFire Ethanol Fuels (OTCPK:BFRE) is a company which converts municipal solid waste (otherwise known as garbage) into ethanol. The company came public through a reverse merger in 2006 to access the public markets for funding. Management has worked together for many years at ARK Energy and has extensive experience in funding and permitting energy projects. Through their experiences, the company developed a series of patents surrounding their process, which has been proven extensively, as they had a production program running in Izumi Japan for four years. Recently, the company secured $15 million worth of funding and is about to break-ground on their first US production facility in Lancaster, CA.

The ethanol industry has been the topic of much debate in recent months. The “green attributes” of corn-based ethanol have come under fire (soil erosion, the emissions from producing ethanol, lack of transportability) and consumers have found corn and grain prices skyrocketing as farmers directed much of their crops to make ethanol vs. selling them for food. The “food vs. fuel” debate has highlighted the problem with the US’s current ethanol situation.

In recognizing this, congress recently passed The Energy Independence and Security Act of 2007 (HR 6). In that, it requires that 21 billion gallons of “advanced biofuels, such as cellulosic ethanol) be produced by 2022. In the near term, these figures are:

  • 2009: 600 million gallons
  • 2010: 950 million gallons
  • 2011: 1.35 billion gallons
  • 2012: 2.00 billion gallons

BFRE’s solution not only solves the “food vs. fuel” debate, but its plants are also 70% self-powering and therefore do not consume diesel or other oil-based fuels in production. Its plants run on a combination of methane gas (siphoned from the landfill) and lignin, which is a byproduct of their concentrated acid hydrolysis process. While this will serve the company well from a public relations standpoint, it may also make them eligible for substantial federal and/or state tax credits.

Unlike other ethanol companies which make ethanol from corn, BFRE produces it from “municipal solid waste” – this can be wood chips, green waste, or trash. The waste streams contain cellulosic material, and BFRE’s process removes the stored energy from the cellulosic material by breaking it down with acid. The process is known as “concentrated acid hydrolysis.” While other companies are working on solutions to remove the stored energy from garbage and other waste products, BFRE is the only one employing a concentrated acid hydrolysis process. Alternative solutions employ either gasification or the use of enzymes. Neither is working commercially yet and the cost structure of BFRE’s acid hydrolysis process is superior and proven.

Through their partnerships with waste haulers, BFRE has a consistent supply of their feedstock, for which they pay little or nothing. Partnering with BFRE is an attractive option for a waste hauler because doing so extends the life of their landfill and eliminates costly waste burial fees. Further, by using the landfill’s methane gas supply as a fuel in their boilers, BFRE helps the landfill operator avoid costly emissions.

Furthermore, through their partnerships with oil companies/distributors, they have guaranteed “off-take” contracts for the ethanol they produce. Further, they will have what’s called a “wrapper” from the contractor who builds the facility, so with these three pieces in place, they will qualify for project financing. This means that BFRE will likely be able to finance (off balance-sheet) a huge portion of the cost of building each plant via non-recourse debt – thus leaving a very healthy profit stream to flow to shareholders. The project-financing markets, because of their reliance upon guaranteed (and therefore very high quality) revenue flows have not been adversely affected by the recent “credit crunch” and as such, BFRE’s projects remain relatively easy to finance – particularly after their first plant is up and running (q1:2009).

The company should be in production by the first quarter of 2009 with a 3.1 million gallon per year (mgpy) facility. During 2009 they will begin construction of their second facility – a 16.6mgpy facility as well as a 55mgpy facility. The 55mgpy facility will serve as the “blueprint” for the remainder of their facilities. They plan to bring online 3 of these 55mgpy facilities in 2010 and 5 more in each of the remaining 3 years for a total of 20 facilities.

These facilities are very profitable to BFRE. On a 55mgpy facility, the installed cost per gallon is roughly $5.00, while the ongoing production cost per gallon is less than $0.50. Assuming a spot price of $2.02 for ethanol, the numbers pile up very quickly – even removing the costs associated with paying down the debt taken to build the facility.

In contrast, the production cost for corn-ethanol is well over a dollar per gallon – that is a substantial cost-savings over corn-based ethanol production – even before considering the myriad environmental benefits of BFRE’s process vs. corn-based ethanol.

Without considering the positive impact which the tax credits may have, and by discounting dramatically the pace at which BFRE puts new plants into service, it is estimated that BFRE could produce the following non-GAAP financial metrics:

  • 2008: Revenue $0
  • 2009: Revenue $6 million, EPS: ($0.06)
  • 2010: Revenue $53 million, EPS $0.80
  • 2011: Revenue $170 million, EPS $2.95

Ascribing a 12% discount rate, the net present value of the 2010 EPS is $0.57. One can debate the multiple to put on a profitable green ethanol company, but if you were to just put a simple 15x, you are looking at a $8.50 stock – a huge move from today’s $4 price. Discounting the 2011 EPS number yields a figure of $1.87 – a 15x multiple on yields a $28.10 stock price.

As you go further out in time, more and more plants will be online, thus producing substantial cash flows and profits.

This is not a speculative play because the technology has already been proven and a large portion of the financing for their first plant has been secured. As investors become introduced to the name, people will quickly begin to realize the benefits of their technology/process and the uniqueness of their very profitable business model. This should be thought of as a “blueprint licensing” company – astute investors will likely realize this and ascribe a scarcity-value type multiple to this name. Upcoming catalysts will be the breaking of ground on their first facility and production in late 2008/early 2009.

Disclosure: Author holds a long position in BFRE.OB