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Background: For background on the ethanol market see here and here.

Story: Green Plains Renewable Energy (NASDAQ:GPRE) is building a corn based ethanol refinery. That is exactly the same thing that Pacific Ethanol (with a correction here) is up to.

Company: Unlike Pacific Ethanol, GPRE has no other operations, nor any previous business (although they did just acquire Superior Ethanol, which as far as we can tell has similar intentions for a plant in Dickson County, Iowa). They are a pure play on their new plant. The plant is expected to produce 50M gal/year of ethanol, as well as both wet and dry Distillers Grains, near Shenandoah, Iowa. They do not indicate any plans to recapture CO2. The plant construction is in the the very early stages, with the main contractor expected to begin work approximately next week. They also have some additional land interests for future plant sites.

Their management team has some financing expertise, a lot of irrelevant expertise, and some farming knowledge. The only ethanol refinery expertise is as investors in previous ventures, although there is nothing to indicate that was anything other than passive. Other than the farming expertise, which is clearly relevant, we find the stated management team credentials unimpressive and largely unqualified. Where are the energy traders, the bankers, and the engineers? If they are all just hired help, what does the team actually bring to the table?

So far this looks to us like a bunch of guys who read the ethanol winds and set up their sails. They could easily run aground. We were skeptical of the Pacific Ethanol financial prospects, but at least their team seemed to have the expertise to have the possibility of pulling the venture off.

Another way to put this issue is this: If any group of guys can get together, land, and hire construction and process engineers, where is the competitive moat? Are ethanol plants really that easy to build and operate? It is just a big still, after all.

Maybe the financing will distinguish them. Nope. From their well-written recent quarterly report, they have about $30M in current assets. No revenues, and about $40K/month in operating expenses for the last year or so. Their current assets will not be sufficient to cover the expected $83M plant construction costs, but they have a $47M line of credit, contingent on the plant being in production by 1 May 2007 (i.e. construction beginning by then). They expect plant completion in approximately 2 years.

Stock: There are about 4.2M GPRE shares outstanding. There is no way to justify their stock price, as they are too early stage. Once constructed, their 50M gal ethanol/year plant will require 18M bushels of corn/year, and produce ca. 160K tons of dry distillers grains (also ca. 148K tons of financially irrelevant CO2). Some years from now, when the plant is in operation, we have no idea what the corn or ethanol prices will be. Nor do we have any idea if they will be able to operate the plant profitably under any circumstances, as they have no proven ability to do so (they also have no proven inability).

GPRE is pure speculation. There is room for that in a portfolio, but just be clear that that is what it is. Their stock price has just about doubled from its low in March, so there are plenty of speculators on board already.

We think there will be much better buying opportunities in the years ahead, but as a last-sucker-out play they seem to have some nice current momentum.

GPRE 3-month chart: