The biofuels industry is abuzz this week. Industry executives
are taking a close look at a new contract in place between
Solazyme (Nasdaq: SZYM)
and consumer goods giant
In a move to make cosmetics with sustainable ingredients,
Unilever will buy at least 10,000 metric tons of Solazyme's
algae-derived oils. The move is an important endorsement for
Solazyme's technology, but it doesn't bring the company any
closer to its goal of becoming a provider of alternative fuels as
Indeed, in the decade since Solazyme was founded, the company
and its rivals have poured hundreds of millions of dollars into
alternative fuel research.
Yet progress has been slow. And investor patience is wearing
The Solazyme/Unilever deal is important in another respect.
Though Solazyme is still likely to lose money in 2014, it will
now move closer to breaking even, and the Unilever contract will
enable the company to once again access fresh capital through a
secondary share offering, if need be. Solazyme's rivals can't say
The entire biofuels industry has been a savior for investment
bankers, and you can get a sense of the serial fundraising by
looking at their share counts. Solazyme is an industry exception,
as it has raised fresh funds primarily through milestone payments
form licensing partners.
Rapidly Rising Share Counts (millions)
Solazyme's share price is now above $10, though the rest of
these stocks trade for roughly $2 apiece. That price indicates
that investors believe these companies will need to raise money
yet again, though it's unclear that there is any desire for
investors to participate in future capital raises.
Taken as a group, these stocks are down 30% this year.
Analysts at Goldman Sachs say "underperformance (for this group)
has largely stemmed from disappointing execution and more
recently, increasing liquidity concerns and thus potential for
greater shareholder dilution."
As a result, an industry shake-out may be at hand. You can get
a sense of how close to bankrupt these firms are by looking at
their cash burn for the first six months of 2013, and how much
cash they have left.
Disconcerting Cash Burn
Amyris (Nasdaq: AMRS)
raised $60 million in fresh capital this summer, which buys the
company another three to four quarters before the money runs out.
KiOR (Nasdaq: KIOR)
has a huge funding gap, relative to its expansion plays and it's
not clear if the company will be able to raise the money it
Dyadic International (Nasdaq: DYAI)
, to its credit, is generating positive cash flow, and management
has repeatedly emphasized that no new shares will be issued to
shore up the balance sheet.
Most of these firms have recently opened (or will soon open)
production facilities to start producing products in high
volumes. The five companies (excluding Dyadic) expect to see
sales grow from $162 million this year, to $541 million next
year, marking a true industry inflection point.
Yet it's not clear that the cash problems will go away.
Indeed, analysts expect all these companies to generate hefty
earnings per share (
) losses again in 2014, despite the benefit of rising revenue.
And before these companies can break even, they will need to
scale up production even further, which will require more
At this point, it would appear that Solazyme is the best house
in a bad neighborhood.
Commenting on the Unilever deal, Goldman Sachs' analysts noted
that the contract signing was the "long-awaited major customer
event that could start to put some of the bear concerns around
demand visibility to rest." These analysts, who have a "buy"
rating and a $14 price target, see Solazyme's revenues climbing
to $491 million by 2015.
Equally important, the company may generate $120 million in
earnings before interest, taxes, depreciation, and amortization
(EBITDA) by then, according to Goldman. The analysts note that
another major deal announcement (with
Dow Chemical (
) may also be in the offing.
On the flip side, KiOR appears especially vulnerable, as the
company will likely need to raise an additional $500 million over
the next 18 months to build out the production facilities it will
need to reach its break-even point -- a true chicken-and-egg
My colleague Andy Obermueller has spent a great deal of time
researching this industry for his
advisory. He thinks the least well-known stock in this group,
Dyadic International, actually holds some of the greatest
industry promise. The fact that the company is committed to
staying cash-flow positive is a real plus, as far as I am
Risks to Consider:
Some of these companies appear ill-equipped to raise yet more
capital, which could lead to a run on their stocks as cash
Action To Take -->
It's clear that this industry has made real technological process
and revenues are finally taking off as new plants come on line.
But that doesn't necessarily translate into operating profits. So
it's wise to scrutinize each of these businesses for their
potential EBITDA generation, based solely on current contracts
and production facilities. By those measures, only Solazyme and
Dyadic appear to have sustainable business models.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.