Fueling Tomorrow: Gevo

By Maxxwell A.R. Chatsko - January 29, 2012 | Tickers: GEVO | 0 Comments

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This is the first article in the Fueling Tomorrow series, which will provide snapshots of technologies being pursued by various companies in the biofuels industry. First up is the isobutanol producer Gevo (NASDAQ: GEVO).

Quick and Dirty

While I was critical of the desperate pursuit of ethanol instead of butanol in a previous article, similar problems plague all biofuels. Therefore, we will assume that feedstocks are currently the equalizing factor. That makes butanol a better fuel because it has more energy (92% per equal volume of gasoline vs. 66.7% for ethanol), is not miscible in water (won’t rust out pipelines, can utilize current gasoline infrastructure), and can run in unmodified engines (drop-in replacement).

Company Overview

Enter Gevo. The company focuses on retrofitting ethanol plants with its bolt-on Gevo Integrated Fermentation Technology (GIFT), which allows ethanol facilities to produce isobutanol using Gevo’s proprietary yeast. Gevo is attempting to exploit one of the interesting advantages of isobutanol over ethanol: its hydrocarbon “building-block” attribute. Of course, many short-chained alcohols can be manipulated into a variety of other value added chemicals. But the four carbon isobutanol has a wider range of derivatives.

Gevo is targeting 350 million gallons per year (MGPY) of isobutanol by 2015. To make that a reality the company has acquired several biorefineries in the Mid-west over recent years and is hoping to begin production at its Luverne, Minnesota plant in 1H12.  

Gevo has signed a non-binding letter of intent with United Air Lines to supply its Chicago O’Hare terminal with the company's isobutanol-derived kerosene biojet fuel in 2013. Aside from fuels and blendstocks the company is attempting to become a major player in plastics, fibers, solvents, coatings, and other specialty chemicals.

Digging Deeper: Proprietary Yeast

Few realize that butanol created using the ABE process was used to produce bombs in WWI and to fuel the British Royal Air Force during WWII. A Clostridium bacterium was used to ferment starch and sugars into acetone, n-butanol, and ethanol. One of the downfalls of the process at the time was the fact that the bacteria found relatively low levels of alcohols – about 6% - to be lethal. The volume of product created using nature’s known biological pathways simply couldn’t match processes that used petroleum. Cheap and abundant oil coupled with rising molasses prices in the 1950’s spelled the end of the ABE process nearly half a century ago.

The fate of many biofuels companies will ultimately be decided by their biological IP – and Gevo is no different. Their technology utilizes a modified ethanol pathway created by researchers at the University of California Los Angeles. It originally allowed E. coli to produce isobutanol instead of ethanol, but has since been introduced in yeast. One of the major advantages of using yeast is that they can survive ethanol and butanol concentrations of about 13% - nearly double that of wild-type Clostridium.

Digging Deeper: Proprietary Retrofitting

Gevo projects that retrofitting a 50 MGPY corn-ethanol plant will cost between $22 and $24 million, while a 100 MGPY plant will cost between $40 and $45 million. A retrofit will take about 14 months to complete from start to regulatory approval, although it can be performed with “minimal downtime” to the existing product line. The key statistic is that there is an estimated 80% volume reduction after the retrofit. That means a 100 MGPY ethanol plant will become an 80 MGPY isobutanol plant. Despite the lower production, that volume of isobutanol contains 9.85% more energy than the original volume of ethanol. The company’s retrofit allows for animal feed co-product production, which enables ethanol producers to retain that line of business.

Bumpy Road Ahead?

Gevo is not the only company with a butanol retrofitting process. BP and DuPont have similar technologies. In fact, Gevo has been in several patent lawsuits with Butamax and DuPont – losing a review of a Butamax patent last year and recently suing Butamax and DuPont over a recovery technology patent. IP disputes are never a good thing for a young company, but this may not be a David and Goliath scenario. Gevo has many patents around its production technologies. Furthermore, the lab at UC Los Angeles that produced Gevo’s current modified yeast pathway created a strain of Clostridium cellulolyticum that can utilize cellulose directly to produce isobutanol – thus saving several energy intensive production steps that break cellulose into fermentable sugars. Will Gevo lease this potentially game-changing technology as well?

Foolish Bottom-line

Gevo has a market cap of $225 million, which may be generous given its lack of performance as of yet (the same could be said of its close competitors too). It will take a few years to generate a steady cash flow because they first need to generate a meaningful quantity of product. With their retrofitting technology being challenged by Butamax, BP, and DuPont they need to focus on proprietary biological technologies. At the end of the day the companies that survive in the industry will likely be those with diverse business lines, such as Gevo, Solazyme, Codexis, and Amyris. Can these companies survive their growing pains before they reach healthy commercial scale?

I believe Gevo's recent run should make any long-term investor think twice before hitting "Buy". A more favorable entry point should present itself given the lack of catalysts in the next few months. I don't see their Luverne plant providing any meaningful long-term bump to the share price.

Up next: Amyris Inc.

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on biofuels and energy @BlacknGoldFool.

BlacknGold

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