Ethanol Industry: Down but Not Out

| About: Verenium Corporation (VRNM)

Ethanol producers have been making the news again - this time a flurry of plant closings and fire sales is mixed in with new plant openings. Taken together, investors have to conclude the ethanol industry is down but not out.

Verenium Corporation (NASDAQ:VRNM) has survived a delisting action by Nasdaq and is building its first commercial-scale cellulosic ethanol facility in Florida. The 365-million capacity plant is expected to cost between $250 million to $300 million to build. So far Verenium appears to have only $7 million from a State of Florida grant. The economics of Verenium’s proposed cellulose-based process have not been provided in detail, but we expect the feed-stock costs to be substantially lower than what VeraSun Energy Corp. (VSUNQ.PK) and other producers have been paying for corn.

VeraSun declared bankruptcy and will likely have to put its various corn processing facilities up for sale in the coming months to pay back creditors. Who would want to buy a costly ethanol plant? Poet Energy, Inc. (private) is one. Poet is majority owned by the Broin family that made its collective bones in the ethanol industry by buying up ethanol plants in the Midwest when the first wave of ethanol companies went bust in the ‘80s. Poet already has 26 plants in 7 states. A new plant in Scotland, South Dakota is now producing cellulosic ethanol at a pilot scale from corn cobs. Importantly, we note that the goods folks at Poet have been quietly developing an economical way to convert existing corn-based plants to the new process. We expect Jeff Broin, President of Poet, to use his previous successful experience to buy up plants may even some of those shuttered VeraSun facilities. Others are just as eager to start up new facilities. Canada-based Syntec Biofuel, Inc. is developing a thermo-chemical process to convert waste biomass to alcohol (ethanol, methanol and propanol). Syntec is targeting a wide range of materials from wood chips to corn stover (stalks and stems) to municipal solid waste as potential feed-stock. Syntec and all the other renewable energy aspirants will likely get a boost from the federal government. Obama’s stimulus package is expected to budget $25 billion for renewable energy projects.

One more note for investors taking another look at ethanol producers. Cellulosic processes may not be less expensive than that required for turning corn into ethanol. However, the input will not necessarily be linked to the commodities markets, making projections and estimates for feed-stock costs more reliable and manageable. That factor alone makes the cellulosic ethanol business model more attractive.

Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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