BlueFire Ethanol Fuels: Converting Garbage Into Profits

BlueFire Ethanol Fuels (BFRE.OB) 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

Comments

[Tom Caracciolo:]

Just two days ago I asked two recently retired chemical engineers, “why are we in the U.S. not proceeding full bore with the production of cellulosic ethanol and doing whatever is necessary to distribute this clean burning fuel to every gas station in the U.S.? The source of cellulosic material in unlimited. We have the capability of installing one ethanol tank in every gas station served by a blending pump from which a customer can choose from E10, E20, E30, E40 or E85 to fill his or her tank. The price per gallon decreases proportionately with each higher blend of ethanol with the traditional regular gasoline. (E10=10% ethanol, E20 = 20% ethanol, E30 = 30% ethanol, and so on.) If all of our gas driven vehicles suddenly used E30 there would be an immediate drop of 30% use of imported crude oil destined for our transportation needs. Further, when enough ethanol is produced, we can further displace crude oil by using E85 in all of our Flex Fuel vehicles” thereby even more seriously reducing our need for imported oil.”

The response from these two chemical engineers was immediate. They said that our federal government is purposely delaying the widespread use of ethanol because special interests through the use of lobbyists are seriously hindering the use of alternative fuel. For example, the exorbitant import tax currently placed on importing ethanol from Brazil. Two special interests that have control of our Congress, Senate and Executive Branch in Washington DC in this instance are: 1. our big oil companies because every gallon of ethanol reduces their profit on every gallon of gasoline that is displaced; and, 2. our U.S. farmers that grow and sell corn want to continue the excess profits they are receiving for every bushel of corn. They know that ethanol made from unlimited sources of cellulose will eventually completely end the use of ethanol made from corn.

2008 Feb 25 06:44 PM

[Spencer Newman:]

Tom- I like the idea of an E10-E20-E30 etc variable pump at gas stations across the nation in the not so far future... and furthermore:
News flash - Everyone talks about a drop in fuel economy comparing ethanol to gasoline. Well, I have read a thorough report from EERC and the Minnesota Center for Automitive research where they tested extensively different blends of fuel on several popular stock vehicles. Here’s some quick results: The 2007 Toyota Camry, which gets 25 MPG on Tier 2 gasoline, received just under 26 MPG with E30. The 07′ Ford Fusion also received a 1% increase in MPG using E30. More impressively, the Chevrolet Flex Fuel Impala had 27 MPG using E20, which is a 15% gain compared to it’s 23 MPG Tier 2 gasoline results. So, ultimately with the CAFE standards, automakers can further improve these stock vehicle MPG tests, when they make adjustments for the firing of the fuel in the chamber absed on the fuel input. Already there exists technology to handle the cold starts, enriching fuel mixture for the first 30 seconds or so. I like the idea of E85 being more readily available, but believe we will most likely see E20 and E30 in the not so distant future as standard at any fueling station. Prepare yourselves Nay-sayers, but you will see great MPG once E20 and E30 is more mainstream and the automakers will adjust for it and meet or exceed the CAFE requirements with ease.

I have evaluated several cellulose to ethanol companies and have personally found that BlueFire is the real deal. I have accumulated shares in BlueFire along with two other energy companies as these small caps will become large cap companies in very short time. Our next boom will definitely be energy and those with the right technology, financing and experience will come out on top.

2008 Feb 26 09:11 AM

[Dr. No:]

So we intend to hydrolyse the trash with concentrated acid ??? How is that going to end up with what is left over ? Spoiled acid ? Non-hydrolysable stuff ? Where are we dumping that ?

The reason we do not have a better alternative to oil and ethanol from corn is that virtually all of the suggested process do not work economically and they do not work large scale.

Of course once the oil price goes higher, the economics change, we will then also accumulate experience what may work and what not. But let's be fair, the oil price was half of today a year ago and half that the year earlier, we do have a (expectable) dramatic change in prices over a short (in engineering terms) period of time.

Odd is that chemical engineers are such experts in public policy and do not point to the technical issues in the process at hand, which is what they should be experts in... The suggestion to have so many different blends is lunatic as the logistics will not work. You will not place that many different containers in a gas station. Europe tried it since 20 years and is going back due to the cost associated. Ain't working.

2008 Feb 26 02:08 PM

[Dr. Cell:]

They reuse the acid. (fyi)

2008 Feb 27 05:00 PM

[Mister C:]

Tom, 30% ethanol content does not translate into 30% reduction in oil consumption. There's half as much energy in ethanol, so it's 15% 'savings'.

Interesting article. There's more I'd like to know about the author. Like, what's his relationship with BFRE. I don't buy his disclosure. There is more than meets the eye.

2008 Mar 05 12:37 PM

[bobju:]

I believe the info on BFRE's website and, as a chemical engineer, also think they are the real deal. They are the only cellulosic ethanol producer that has a highly profitable process, which is problematic for others trying to develop a cellulosic process. They have a small prototype plant scheduled for completion in about a year, and a larger plant to follow that, with many plants scheduled in future years. I have bought some BFRE shares .

2008 Jul 06 09:25 PM

[Mclovin:]

I am writing a policy debate case over this for my junior year in high school and i seee virtually no flaws in the idea to transform one of the most talked about ideas into reality. Not to mention the world wil smell better lol.... well the point is if you are still reading this statement that i would like someone t o submit a list of possible problems so that i can find the answer thanks guys!!!!!!!!!!!!!!!!!!...

2008 Sep 03 05:48 PM

[Rob Mida:]

If you want a list of possible problems, I suggest the site below
energyjustice.net.

Tom,

using a blend of E30 would not translate into a 30% reduction in crude oil imports.
1) The controversial reduction in miles per gallon with alcohol.
2) For corn ethanol you still use diesel on farm equipment, tremendous amounts of water and fertilizer. Nitrogen is derived from (increasingly and up to half imported) natural gas sources. As well as oil.
3)With cellulosic, nobody has yet to make it cost effective - don't listen to engineers blaming public policy, especially when BP, Chevron, and others are MAJOR investors in agro-fuels as it delays the day we stop using fuels and inefficient internal combustion engines.

And this isn't to say our public policies on energy (or financing) are sound. They are near-sighted and foolish at best. If we had had good policy we wouldn't have the crisis we are in now. Large corporations and special interests write the laws and hand them to their insider politicians that they pay off and that's how we've gotten these policies. Any 'solutions' published in the main stream are only market-friendly, feel good, green wash programs, like agrofuels and take away from the real solutions out there.

Also, we hardly have "unlimited" sources for cellulose. It might seem that way, but using all our natural forests for fuel and replacing them with GE monoculture tree plantations will hardly help our situation. Soil degradation is a problem too and contributes much more to climate change than is realized.

I could go on, e-mail me if you are interested in a discussion or would like to know more about why these things are flawed OR the solutions that would actually work.

[e-mail]

2008 Oct 02 03:33 PM