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The disclosure on last week’s earning call from Amyris that it was shuttering or scaling down production at two of its three facilities, effectively putting off major biofuels production for another two to three years, is not altogether surprising. Once technology risk is surmounted in the lab and a feedstock can be converted into a petroleum at a decent yield, the question always becomes: Can you do it at scale?
The original goal had been for Amyris’s three facilities to produce 7.5 million liters of product a quarter, though the company has struggled with yield and separation loss, turning out just over 900,000 liters this past quarter. More importantly, the low production runs pushed the average selling price to $7.70 per liter, well above what the market will bear. Hence, Amyris’s decision to focus on smaller markets with lower volumes and higher selling prices, like the moisturizer ingredient squalene, which sells for $25-30 per liter.
It’s no secret that the EPA drastically overestimated what the bioufels industry could do. In 2012 it had thought that 500 million gallons of cellulosic biofuels would be possible, even though the reality is that the industry should do a bit over 10 million gallons this year. On last week’s earning call Cowen and Company’s Managing Director of Equity Research Rob Stone pressed Amyris CEO John Melo on the question of why production wasn’t scaling and why yields had disappointed.
Melo responded that it had taken Amyris “a lot of learning to be able to get the strains to perform….as well as they have in our environment” along with the challenges presented by separation and the fermentation process. Scaling biofuels is a massive engineering feat that requires tuning to maximize performance. Unlike some industries where being first to market is advantageous, in renewable energy, there’s often a first mover disadvantage because scaling the initial technology is as difficult (or more) than proofing the tech in the lab. Even if we look at Amyris’s share price, which has been bludgeoned from its $16 per share IPO price to about two bucks today, there’s a compelling case to be made for a second mover stepping in, buying the assets (the market value of the entire company is a scant $115 million compared to almost $2 billion at its peak), recapitalizing the company, and making a decent return.
The big picture for biofuels
Amyris is not alone. Other leading biofuels companies Solazyme, Kior and Gevo are off at least 40 percent from their 2011 IPO share pricings. What keeps investors in the game is the massive reward being floated. If biofuels succeed, they have two major advantages. 1) Unlike corn ethanol which had a pricy food feedstock—corn—many of the advanced biofuels are largely feedstock agnostic and 2) it’s a drop in fuel with no limitations on the percentage that can be used. It’s ready to go, direct into the transportation fuel supply, replacing imported crude oil.
Despite asking difficult questions and having neutral recommendations on Amyris and Gevo, Stone is still cautiously optimistic. “This industry is in crossing the chasm phase. You went through a phase where there was a lot of enthusiasm and lot of companies went public, and now a lot of companies are pushing out the ramp up on production, and stock prices are way down. We’re waiting for the upturn on the other side of that gap where realities and perceptions will start to move in a favorable direction.”
Stone’s models indicate that with oil prices as low as $70 a barrel, a company like Kior could compete with imported crude if it can scale its future plants to processing 1500 tons per day of feedstock (its Columbus plant, which is expected to be on line in the second half of this year, could theoretically do 500 tons per day). And it’s proving that the initial facilities can scale reasonably in the first place that is going to be critical.
As my colleague Katie Fehrenbacher has pointed out, companies like Kior IPO’ed and raised money in public markets with very long term risk/reward horizons, and to further scale, all biofuel companies are going to have to raise more cash. That fundraising ability will all depend on showing production capacity at initial plants. Amyris raised an additional $83.7 million in February, and Stone noted of the timing of the Amyris raise, “had they waited to put out this quarterly release they may not have been able to raise as much on the same terms.”
The dream of replacing foreign oil dependence with a renewable transportation fuel is a big dream and a bigger market. But from the lab to the production facility, there’s enormous risk, and if the commercialization hurdles can’t be crossed, it’ll be just that–a dream.