Isobutanol to soar

Next-gen, commercial scale biofuels debut in Minnesota – is the deck cleared for the isobutanol pioneer to soar?

Not quite yet, with litigation and production ramp-up pending, but there’s light at the end of the tunnel.

In Colorado, Gevo announced it has begun startup of the world’s first commercial biobased isobutanol production plant located in Luverne, Minn.

“At 1 p.m. MDT yesterday we made history by initiating production of biobased isobutanol at commercial scale,” said Dr. Patrick Gruber, CEO of Gevo. “One year ago, we broke ground with a startup goal of less than 12 months and we’ve succeeded. It’s an extremely proud moment for Gevo and a tribute to the drive and ambition of our scientists, chemical engineers and production team.”

Gevo retrofitted the Luverne plant to incorporate its proprietary yeast and Gevo Integrated Fermentation Technology (GIFT) system to produce biobased isobutanol. Through initial operation of the Luverne plant, Gevo expects to advance its learning of large-scale production of renewable isobutanol at the site maintaining a goal of producing isobutanol at a run rate of approximately 1 million gallons per month by year-end 2012. Per its previous guidance, Gevo expects to reach full-capacity run rates by yearend 2013.

Ramp-up rate

“This ramp up in production is actually fast for a new technology,” said Gruber. “It would be much longer and present more execution risk if this were a greenfield plant. I like this retrofit approach.”

“This is only the beginning for Gevo as we work toward our first shipment to Sasol and increasing production over the coming months,” added Gruber. “As with all plant startups we will face challenges. However, we have an outstanding team, many of whom have been through similar startups before, to address and meet these challenges. We look forward to growing into a very large business.”

The Elephant in the Room, pending IP litigation

Cowen & Co’s Rob Stone writes, “The court has not yet ruled on the potential injunction that could shut GEVO down. The hearing was held in early March and a ruling could come at any time. It would be effective until the trial, which is scheduled to start in April 2013. The injunction could be imposed, denied, or imposed partially. For example GEVO could be stopped from its work on fuels, but allowed to make and sell solvents. In our opinion, the legal battle represents a more significant risk than initial startup and ramp pace.

Next stop – another capital raise for further expansion

Pavel Molchanov, writing about the company’s share price drop (40% off since the beginning of May), commented, “We think this reflects the market’s expectation of near-term equity issuance – and, to be clear, management has said publicly that another capital raise is planned over the next few quarters. We understand that dilution risk causes investor concerns, but we would point out that the stock is currently trading at just 47% of our DCF/share estimate of $11.55, an estimate that already incorporates equity issuance in each of 2012, 2013, and 2014.”

Upcoming advanced biofuels openings

Amyris – Paraiso plant, Sao Paulo, Brazil, start-up in mid-2012
KiOR – Columbus plant, Mississippi – mechanically compete, production commencing by year-end 2012.
Solazyme-Bunge – Moema plant, Sao Paulo plant, start-up scheduled in the second half of 2013.

Reaction from the investment community

Mike Ritzenthaler, Piper Jaffray: Maintain Overweight rating and $17 price target.

“While every novel process startup contains some uncertainties, we believe Gevo has an outstanding team in place with the optimal expertise needed to understand and mitigate risks – and meet or exceed important production milestones between now and the end of the year. In our view, the startup of Luverne also underscores management’s conviction that the ruling on the preliminary injunction will positive for Gevo, and we are unconcerned that the ruling (that we expected mid-May) has not yet been issued.”

Robert W. Stone, Cowen & Company: Maintain Neutral.

“The Luverne plant has started making isobutanol a little ahead of schedule. However, the pace of ramp to full production remains to be demonstrated. Meanwhile, the Butamax IP battle remains a significant risk. Construction began on May 31, 2011 and was expected to last twelve months. Guidance from the May 1 earnings call suggested a late June startup, leaving time for contingencies during final cutover. It appears that the cutover went smoothly, as it took three weeks or less. Guidance also suggested initial shipments to Sasol would be in July; it now appears possible that shipments could begin in Q2.”

Pavel Molchanov, Raymond James: Maintain Outperform, DCF estimate of $11.55

“Here is a specific, concrete example of actual Gen2 scale-up. Gevo’s first commercial production facility.  Gevo is now working towards its goal of shipping its first product to Sasol (SSL), one of its anchor customers, and management previously indicated shipments should begin by July. Our current assumptions are for sales of 0.9 million gallons in 3Q12, 1.8 million gallons in 4Q12, and up from there.

“We don’t rule out the possibility of delays in scaling up output, and of course, key performance metrics – yield, etc. – still have to be demonstrated. Management has also consistently pointed out that there is plenty of execution risk. That said, we look at Luverne as an encouraging datapoint. In fact, of all the recent IPOs in the space, Gevo becomes the first Gen2 producer to bring a fully commercial plant online.