The appeal of biofuels is self-evident. Producing fuels from
natural substances such as algae -- instead of crude oil -- can
help wean the country's dependence on imported oil. And many
biofuels hold the promise of lower costs than oil-based fuels. That
was the lesson brought home on Sept. 24 when biofuels firm
announced it would shift production at a key plant from making
isobutanol to ethanol. It may seem like a subtle shift, but it has
Holy Grail no more
Butanol is something of a wonder drug in the field of
petrochemicals. It can be blended with gasoline (with much higher
energy density than ethanol), or it can be used as a building block
for a number of processed goods such as plastics, jet fuels, fibers
and others. Its relatively high-energy density along with its
multi-use quality make it quite valuable, currently trading at
$2,800 per metric ton (or twice the price of plain old gasoline or
Although Gevo has shown great promise in producing smaller
batches of a biofuel version of isobutanol -- bio-isobutanol
-- the company announced in September that larger batch sizes
weren't yielding the desired output. Contaminants were getting in
the production process and some batches had to be tossed out.
Getting consistently good batches proved to be more difficult than
The company characterized the problem as a matter of getting the
kinks out, yet it announced at the same time that its Luverne,
Minnesota, plant would no longer make bio-isobutanol. Instead
the plant will make ethanol, a commoditized product that fetches
lower prices. Trouble is, the company isn't financially structured
as an ethanol producer. Ethanol gross margins are currently around
zero, implying negative operating margins. And if you read between
the lines, then you can see that Gevo may never be able to realize
its goal of being a leading bio-isobutanol producer.
Gevo, which remains unprofitable, could be out of money by early
2014 -- even if it is able to fix the isobutanol production
glitches. Let's assume for a moment that Gevo can get back on track
by early 2013. The company will still be burning cash as it
produces negativeEBITDA far into the future. In fact, it would take
two plants working full-time producing isobutanol just to hit
break-even, according to analysts at UBS. And this is not likely to
happen before 2015 -- if at all. This means Gevo will need more
And this is where it gets tricky. Until and unless Gevo can get
its isobutanol production back on track, the company will be
hard-pressed to raise more money. Ethanol producers are a dime a
dozen these days -- especially with mandated ethanol production
quotas at risk of being eliminated in next year's Congress. Gevo is
now racing against the clock.
Can Gevo work out the bugs? Well, it's not a hopeful sign that
the company's chief technology officer, David Glassner, decided to
resign on Oct. 1. This may have been a sign that a technology fix
is neither imminent nor feasible.
We'll get an update on Gevo's technology issues and its cash
burn rates when the company delivers quarterly results on Oct. 30.
Look for discussions around the current quarterlyburn rate of about
$15 million. Management may also provide a look at 2013 financial
projections. Gevo raised $98 million early in the third quarter,
and likely ended the quarter with roughly $120 million. By my math,
cash will be around $100 million at year-end and less than $40
million by the end of 2013. These forecasts assume that the
isobutanol bugs will be worked out. If not, then that burn rate may
be even faster.
For now, I give this stock "4" bankruptcy rating, which means
that bankruptcy concerns aren't imminent, but the company may need
to sell stock in the next 12 months. However, if the technology
update on Oct.30 proves disappointing, then I may be inclined to
move the rating up to "6," which implies that bankruptcy is
possible within the next 12 months.
OCZ bankruptcy watch update
Data storage firm
's troubles have deepened
since I profiled the company on Oct. 12.
The company announced in the past week that its leading sales
executive has resigned and that Nasdaq issued the company a warning
that it is now out of compliance with its regulatory filings. I
noted on Oct. 12 that the company hoped to restate its recent
filings, but it subsequently announced that it needs more time to
address the scope of theaccounting problems.Shares continue to
trend lower, so a 2013 bankruptcy filing can't be ruled out.
Risks to Consider:
Upside risks for Gevo? A fix for the isobutanol production
glitches would help the company, though the near-term switch to the
production of ethanol would make it hard for the company to pivot
right back to isobutanol production.
Action to Take -->
Even if Gevo is able to sell more stock in 2013, then it
would still likely force shares well lower just to line up
sufficient investor demand. So even though this is not yet a
"terminal short," it still has ample downside from here.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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