Advanced Biofuels And The Dire Need For Capital

by: Kevin Quon

On Wednesday, June 27, Gevo (NASDAQ:GEVO) announced plans that it expects to raise up to an additional $100 million through a secondary offering of common shares and convertible senior notes due in 2022. Correspondingly, shares sold off a whopping 22.5% during the day in light of the expected dilution to come. Part of this sell-off was in light of the company's recent rise. The advanced biofuel company has had a stream of recent success lately, topped off with a favorable ruling that its process did not infringe upon a patent held by Butamax Advanced Biofuels LLC, a joint venture between DuPont (DD) and BP Plc (NYSE:BP).

Yet Gevo's return to the markets in order to raise capital presents another issue - one that has begrudgingly come to typify the advanced biofuel sector altogether. At the very core of the issue lies this one simple fact: Building out manufacturing capacity is very expensive. With the typical commercial facility appearing to cost anywhere between $50 to $400 million on average, one of the greatest struggles of these new companies is the ability to finance the construction of their facilities and to simultaneously meet their operating expenses. The following companies largely make up the advanced biofuel sector. All values were taken as of June 27, 2012.

Company Name IPO Price Last Price Cash & ST Inv. (Mar12) Current Ratio Fwd. Analyst EPS Est. (Dec13)
KiOR (NASDAQ:KIOR) $15 $8.73 $152.2 Million 5.40 (0.81)
Gevo $15 $6.80 $74.0 Million 3.47 (1.64)
Amyris (NASDAQ:AMRS) $16 $4.09 $103.4 Million 1.36 (1.30)
Solazyme (SZYM) $18 $13.67 $218.7 Million 9.83 (1.00)

As a result, there is a pressing need for these companies to preserve capital and yet to simultaneously build out their operations as quickly as possible. As the recent hit on Gevo's stock price clearly demonstrates, the capital markets have been growing ever tired with the profitless companies. To date, not one of the following companies trades higher than a 25% discount to its IPO offering, most of which occurred about 1 year ago. The following graph demonstrates the quick deterioration of the sector's cash balances:

KIOR Cash and ST Investments Chart
(Click to enlarge)

KIOR Cash and ST Investments data by YCharts

A look at the companies in the above chart illustrates one narrow view of the situation. Taking Gevo into account, the only other company to raise capital after their IPO through an offering of common shares was Amyris back in February 2012. KiOR has thus far managed to avoid this, but has resorted to raising additional capital through a $75 million loan back in January 2012. The only company that has not had to seek additional capital to date is Solazyme . However, there remains a risk that all of these companies will eventually have to come back to the market for additional capital, as all are expected to be running at a loss for at least another year.

Simultaneously, all of these companies are continuing to build out their production capacity. KiOR's first commercial facility in Missouri is reportedly now "mechanically complete," but expectations of a second facility that is estimated to cost $350 million could mean that the company might be raising capital at a later time. Amyris and Gevo continue to burn cash in a manner that is somewhat alarming. As of March 30, 2012, Amyris and Gevo had cash and short term investments of $103 million and $74 million respectively. As of December 2011, Amyris again had $103 million and Gevo had $95 million respectively. However, it is important to recall that Amyris raised $83.7 million during this time period.

Only Solazyme appears to be in a position of capital strength, although I would contest that it isn't even much of a biofuel company at all. More about that can be read in my other article here. However, much of its advantage appears to be due to its business strategy of creating joint ventures and splitting the capital expenditures. In the instance of one 50-50 joint venture, its partner Roquette even agreed to pay for all of the capital expenditures and working capital needed for an operation that could be as big as 50,000 metric tons of capacity. With its larger partner found in Bunge (NYSE:BG), the 50-50 joint venture was split down the middle but was also likely to be accommodated with debt financing to help reduce the amount of upfront capital required.

Capital preservation appears to be the name of the game. Raising capital to build out facilities was the reason why these public companies initially listed on the market. Yet the market's lack of patience with these companies, who are very far away from having positive earnings, is also the reason why these stock prices have fallen. Likewise, the falling stock prices have also been the reason why raising capital in the future is becoming increasingly more difficult for this sector. While neither of these companies are truly competing against each other in a market space as large as this, it is clear that some of these companies are in much better shape financially. The ramifications of which can only benefit the company further down the road.

Disclosure: I am long SZYM, BG.