Verenium: A Call Option on Cellulosic Ethanol Technology

| About: Verenium Corporation (VRNM)

Mid July, we had the opportunity to meet Verenium Corp. (NASDAQ:VRNM) executives during their last trip in Europe:

  • Carlos A. Riva – President & Chief Executive Officer
  • Kelly Lindenboom – VP Corporate Communication

After a brief reminder of both integrated companies, Diversa and Celunol, we discussed VRNM technology and the challenge to break down cellulose.  This was a very educational part of the meeting as the CEO shared his in-depth knowledge of their technology.

We have been following this concept for few years now and believe it could be a good alternative to the first generation ethanol in the US. It is our understanding that the management has high hopes for the new mandate in place (2007 EISA Mandates) even though it will not base its growth scenario on the government subsidies. We believe this is the appropriate decision.

The question mark is now the mass production and it seems to be a clear goal for VRNM. The company is running a 1.4m gpy demonstration plant using initially bagasse and energy crops and is now turning towards a commercial plant of 25m gpy (2009).

As an investor, two questions need to be answered before jumping in the stock: which corporate will come on board and how far are we from the commercialization point?

As a summary, we are bullish on the technology developed by VRNM even though we believe that local initiatives like microalgae processing will complete the biofuel offering in the US in the next 5 years. We also would have appreciated more forecasts on the next 3 years numbers, but understand the development stage of VRNM and growth objective indicated by the management.

Marketwise, the stock is still trading as an R&D company, in line with the first generation ethanol producers (and limited liquidity). Recent comments bt Syngenta's (NYSE:SYT) CEO regarding that space and their 10%+ ownership leads us to follow VRNM closely.

After the meeting, we wrote: “the next corporate announcement could be a good buying opportunity if you are a long term investor”. Since then, sooner than expected, BP (NYSE:BP) and Verenium announced a "significant partnership to accelerate the commercialization of cellulosic ethanol." Over the long run, VRNM should stand apart from the first generation ethanol producers, i.e. VeraSun (VSE),  Aventine (AVR) and Pacific Ethanol (NASDAQ:PEIX). At $2, the stock is a call option on cellulosic ethanol technology. 

Disclosure: Author holds a position in VRNM