Algae Based Biofuels Introduction
Algae Based Biofuels have been hyped in the media as a potential panacea to our Crude Oil based Transportation problems. Algae Based Biofuels as a Green Investing Opportunity is still some years away as the technology is still quite nascent.Despite a lot of hoopla and a number of IPO’s with synthetic biofuels as business,large scale commercial production and profits are still some time away.However the promise of this technology to revolutionize the Fossil Fuel powered Transportation Sector is Huge.Large Oil and Gas is already positioning itself in a small way to take advantage of this opportunity.Shell has been the biggest investor in Biofuels with a $12 Billion tie up with Brazilian Sugar Giant Cosan.The advantages of Algae Biofuels are being propagated by strong backers like Bill Gates ,Rockefeller family and Exxon Mobil.The main advantages of algae based biofuels are Efficient Land Usage,Reduction in Global Warming affect and ability to be directly used in vehicles and aircraft.However Algae Biofuel Technology is still quite immature despite startups like Solazyme,Algenol,Sapphire Energy and Synthetic Genomics having made impressive strides.
Solazyme Introduction
Solazyme a Chevron backed small algae biofuel based startup has bagged big name investors for its Series D Funding Round.It has bagged Food Companies like Bunge,San-Ei Gen and Unilever as Investors besides Chevron as Fuel Distributor and Branson as an Airline consumer.The Food Companies as investors makes a lot sense as Solazyme is thinking of tapping the Food Markets for its algae based products.Besides these wins,Solazyme has bagged a huge150,000 tons Fuel Follow-on Supply Contract.This order reflects the success in delivering the earlier 20,000 tons contract.Solazyme has also received a R&D and Supply Contract to develop biofuels for US Navy Jets.
Recent Algae Based Biofuel IPOs – Mixed Performance
Solazyme IPO follows on the footsteps numerous BioFuel Startups which have recently issued shares in US IPOs like Codexis, Inc. (NASDAQ: CDXS), Amyris, Inc. (NASDAQ: AMRS), Gevo, Inc. (NASDAQ: GEVO).Solazyme has not revealed the Pricing yet for its IPO though it has filed a S-1 with the SEC .Amyris has been one of the most successful IPOs in the US market over the last year giving a 1 year return of over 90%.Gevo and Codexis too have outperformed the Nasdaq in the last 1 year giving a return of 10%,though Codexis is giving negative returns for its IPO investors while Gevo is just about in the black..With Oil and Coal prices shooting through the roof,Biofuels are again back in vogue even as Government mandated compulsory mixing of Biofuels in Transportation makes these companies somewhat immune to oil price volatility.
Solazyme Technology
Solazyme use standard industrial fermentation equipment to ferment oil-producing microalgae plant sugars in dark fermentation tanks, utilizing “indirect photosynthesis,” in contrast to common open-pond and photo bioreactor approaches followed by other algae biofuel companies.Note they save on effort of separating the water from the produced oil . Solazye says it can utilize a wide variety of renewable plant-based sugars, such as sugarcane-based sucrose, corn-based dextrose, and sugar from other sustainable biomass sources including cellulosics.
Solazyme Cost and ASP
Solazyme says it will be able to produce algae oil for the fuels market at “below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter).The company claims to have decreased its cost from almost $10,000 ton in 2007 which certainly seems quite impressive.The Company is projecting an ASP of around $2000 per ton from the Fuels Market,$10,000 from the Nutrition Market to $2 million from the Skincare Market (midpoint).IF the company is able to realize these kinds of selling prices,then it will be fabulously profitable,though it remains to be seen.
Solazyme Market
The company is targeting 3 markets with a total value of $3.1 Trillion.
- Fuels and Chemicals – Renewable oils can be refined and sold as drop-in replacements for marine, motor vehicle and jet fuels
- Nutrition – Microalgae-based food ingredients including oils and powders that enhance the nutritional profile
- Skin and Personal Care -Portfolio of innovative and branded microalgae-based products. Our first major ingredient is Alguronic Acid
Solazyme Production and Manufacturing
Fom January 2010 through February 2011, they produced well over 500,000 liters (455 metric tons) of oil which implies a run rate of around 3 million liters.In March 2011, they entered into an agreement to purchase a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2 million liters located in Peoria, Illinois (the Peoria Facility).The company has signed multiple non binding contracts with partners to producer and market biofuel.Aims to commence production of oils for the fuels and chemicals markets at one large commercial facility by 2013 and additional facilities in 2014 and 2015.
Solazyme Partners
- Chevron Under the terms of the current agreement, Chevron is providing research funding through June 30, 2012.
- US Navy. In September 2010, we entered into a firm fixed price research and development contract with the DoD, through the Defense Logistics Agency, Fort Belvoir, VA (DLA), to provide marine diesel fuel. We agreed to produce up to 550,000 liters of Soladiesel HRF-76 marine diesel for the US Navy’s testing and certification program
- Dow.The agreement is mutually exclusive in the area of microbe-based oils for use in dielectric insulating fluids until January 1, 2013. In conjunction with the execution of the joint development agreement, we entered into a non-binding letter of intent whereby Dow could purchase up to 20 million gallons (76 million liters) of our oils in 2013 rising to up to 60 million gallons (227 million liters) of our oils by 2015, subject to certain conditions.
- Roquette. In November 2010, we entered into a joint venture agreement with Roquette.
- Sephora. In December 2010, we entered into an exclusive distribution contract with Sephora International to distribute our Algenist™ product line in Sephora International stores in Europe and select countries in the Middle East and Asia.
Solazyme Financials
Solazyme has generated $38 million in revenues in 2010 almost 300% increase over 2009.R&D program revenues represented 100% of our total revenues in 2008 and 2009 and 60% of our total revenues in 2010. Revenues from government grants and agreements represented 82%, 44% and 43% of total R&D program revenues in 2008, 2009 and 2010, respectively.The company is generating losses as it is still in the startup phase and has around $52 million in accumulated losses with around $80 million in cash and ST investments.Debt is currently negligible.The financials are quite good compared to similar algae biofuel companies.
Solazyme Advantages
1) Low Capex Requirements as it relies on partners for both manufacturing and marketing of products in different end markets.Uses standard fermentation equipment and has a customer centric approach to technology development
2) Customers and Contracts – The company has manged contracts with Big Customers like the US Navy and US Airforce 50/50 joint venture with Roquette, one of the largest global starch and starch-derivatives companies.
Solazyme Valuation
The Company valued itself at $85 million in 2009 to around $430 million in 2011 based on the stock options it gave to its management.Currently Amyris is the most expensive company with a market cap of around $1.3 billion.Note Solazymes ships more algae based fuel than Amyris.Also it is targeting the same markets as Amyris does,however Amyris has double the revenues generated by Solazyme.I think Solazyme will also look to target a market cap of around $750-1000 million.
Summary
Investment in Solazyme is more akin to a VC/PE investment rather rather than an equity investment.The company is probably not going to be profitable for the next few years.The risks are common to a high-tech startup such as technology risks,liquidity risks,management bungling etc.However Solazyme seems a tempting buy given its seductive technology and its contract and customer wins till date.Might be a interesting though risky buy if the valuations of the IPO are not too set too high.
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