Bio-based chemical companies face difficult stock market conditions in 2013

17 January 2013 19:51  [Source: ICB]

It has been an exceedingly difficult stretch for bio-based chemical companies in the past year as public valuations cratered and the window for initial public offerings (IPOs) closed. Operational hiccups, plant closures and an uncertain regulatory environment contributed to major stock price declines.

US-based companies Amyris, Gevo and Metabolix saw equity price declines of 70% or more in 2012, but have since recovered some of those losses in early 2013.

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"There is a large gap between investor expectations of a smooth path to revenue generation and profitability, and the reality of the time it takes to ramp up large-scale plants with new technologies," said Andrew Soare, analyst with US-based consultancy Lux Research.

While the extension of US government tax credits for alternative fuels and renewable energy in the partial deal to avert the US fiscal cliff gave a temporary boost to bio-based chemical and fuel stocks, investor concerns about the commercial viability and profit generation potential for many of these companies linger.

"The extension of tax credits was a relief to companies, but it won't accelerate their ability to de-risk technologies and work out the kinks," said Soare. "Ultimately any government support is extremely uncertain and it is impossible to build a sustainable business model on this. It is not a long-term driver."

One bio-based chemical company thinks the selling has been overdone. In a rare move among start-up companies that have yet to generate positive cash flow, Gevo on 2 January announced a $15m (€11.5m) stock buyback programme.

The buyback represented around 19% of its outstanding shares as of 8 January when Gevo's stock traded at just over $2. As early as July 2012, Gevo sold 12.5m shares of common stock at a price of $4.95 each for gross proceeds of around $62m. It also sold $45m in 7.5% senior convertible notes due 2022. Total net proceeds after expenses from the two offerings were $98.8m.

"This new stock repurchase programme reflects our confidence in Gevo's future," said Patrick Gruber, CEO of Gevo. "We see this programme as an opportunity to enhance value for our stockholders through disciplined repurchases of shares of our common stock at what we believe are undervalued prices."

Gevo ended the third quarter of 2012 with around $92m in cash and $27m in debt. During the quarter, it used almost $23m in cash in operating activities.

SOLAZYME BOOST

On the positive front, US-based Solazyme received a boost in mid-December after announcing it had successfully scaled up its sugar-to-oil fermentation process to 500,000 litres at US-based agribusiness ADM's plant in Clinton, Iowa.

Solazyme is initially targeting production of 20,000 tonnes/year of renewable oil from corn dextrose starting in early 2014 at the ADM facility, with targeted expansion to 100,000 tonnes/year. The company is also constructing a 100,000 tonne/year renewable oils facility in Moema, Brazil with US-based agribusiness Bunge, which is set to begin operations earlier in the fourth quarter of 2013.

Gevo stock price

"Confirmation of a successful initial trial run at the Clinton site comes earlier than expected and should help allay concerns about the scale-up of Solazyme's sugar-to-oil conversion process," said Laurence Alexander, analyst with US-based investment bank Jefferies.

"The company's ability to scale up has been a key concern leading to higher discount rate being applied to the project pieline," he added.

Solazyme aims to transform a range of low-cost plant-based sugars into oils for the fuel and chemicals, nutrition, and skin and personal care markets. It filed a registration statement with the US Securities and Exchange Commission to issue up to $30m in securities in connection with its ADM partnership.

In November, Solazyme agreed to give ADM a warrant to buy 500,000 shares of its common stock. Shares of Solazyme traded at around $8/share as of 8 January.

While Solazyme has demonstrated some operational success, there have been more high-profile setbacks in the past year, causing major blows to investor confidence.

SETBACKS

In September, Gevo halted production of bio-isobutanol at its Luverne, Minnesota, facility, temporarily shifting to ethanol production while making operational adjustments to improve bio-isobutanol production capabilities. The company had just started commercial operations at Luverne in May, and had planned to ramp up production to a run rate of around 1m gal/month (3.8m litres/month) of bio-isobutanol by the end of 2012.

"Our goal now is to resume isobutanol production in 2013 when Luverne can generate a positive contribution margin producing isobutanol and we can become a consistent supplier to our customers," said Gruber upon the release of third-quarter 2012 earnings.

The retrofitted ethanol plant is supposed to be able to produce as much as 18m gal/year of isobutanol using Gevo's proprietary yeast and fermentation system. The product was slated to be sold to South Africa-based chemical and fuels company Sasol, among other customers.

Germany-based synthetic rubber producer LANXESS made a $27m investment in Gevo prior to its initial public offering (IPO) in February 2011 and owns an 8.6% stake in the company. Gevo came public at $15/share. France-based energy and petrochemical company Total also had a 9.3% stake in Gevo as of its latest 13-G filing with the US Securities and Exchange commission in February 2012.

LANXESS had expected to finalise a 10-year exclusive supply agreement for bio-isobutanol with Gevo by the end of 2012. LANXESS would buy bio-isobutanol from Gevo and convert it to isobutene for butyl rubber production.

Bio-based stock pricesIn January 2012, US-based biopolymers company Metabolix announced the termination of its Telles joint venture with ADM to produce new PHA (polyhydroxyalkanoate) bioplastics at ADM's site in Clinton, Iowa. The venture was started in 2006 and aimed to gain traction for PHA bioplastics. However, there was ultimately not enough downstream demand to justify running the plant.

Metabolix is now working with partner Spain-based pharmaceutical ingredients company Antibioticos to produce PHA bioplastics. It expects Antibioticos to begin producing demonstration quantities of biopolymer resin in early 2013 and the companies plan to complete a contract manufacturing agreement that Metabolix expects will lead to commercial-scale production later in 2013.

"While [the Telles venture] was a big blow, it is not the end of novel biopolymers or bio-based chemicals," said Lux Research's Soare. "Drop-in products are the better sell right now, but if you can bring improved performance and lower cost with a new molecule, it can ultimately be more valuable."

On the novel biopolymers front, Netherlands-based Avantium is working with US-based beverage giant Coca-Cola and France-based consumer products company Danone to produce polyethylene-furanoate (PEF) bottles. These new biopolymer bottles made from plant sugars would be an alternative to traditional polyethylene terephthalate (PET) bottles.

The extent of the stock market declines for bio-based chemical companies has made it difficult, if not impossible, for companies to go public.

Many companies such as Genomatica and Elevance Renewable Sciences pulled their planned IPOs in 2012, instead raising funds through alternative methods. So far in 2013, the IPO window remains shut.

"I don't think the IPO window will reopen anytime soon. There is no reason for companies to pursue raising money in public markets now," said Lux Research's Soare. "However, companies have been able to get funds from venture capital and through some creative ways. Companies are not handcuffed to public markets."

ALTERNATIVE FINANCING

US-based Amyris, which aims to convert plant sugars into a range of chemicals and fuels, raised $42.25m in a private placement of common stock in late December. At the time it also announced the successful production of renewable farnesene at its industrial fermentation plant in Paraiso, Brazil. This building block hydrocarbon will be used in specialty chemical applications as well as fuel.

"Our own farnesene plant at Paraiso has been successfully commissioned, with initial farnesene production under way. We anticipate sales from this facility during the first quarter of 2013," said president and CEO John Melo.

US-based Genomatica, which is working on bio-butanediol (bio-BDO) and bio-butadiene (bio-BD), raised $41.5m in equity financing last August from Italy-based chemical firm Versalis, along with existing venture capital shareholders.

In July, US-based Elevance Renewable Sciences, which is working on producing specialty chemicals from renewable oil feedstocks, raised $104m in equity financing from investors including Malaysia-based conglomerate Genting, and France-based Total.


By: Joseph Chang
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