Tuesday, April 10, 2007

Ethanol Innovation

Wall Street appears to be awakening to the supply and cost risks inherent in corn-based ethanol production. Cellulosic technologies are finally receiving attention from the financial press. The Wall Street Journal ran an article entitled “Very, Very Big Corn, Ethanol and its Consequences” back on January 27, 2007.

My Midwest tour took me to Sioux Falls and the offices of
Poet, LLC (formerly Broin Companies, Inc.). Poet, so named because management believes there is “poetry” in ethanol production, has been in the business since 1987 when the company started production at its first ethanol plant in Scotland, South Dakota. It is worth noting that several of its plants were purchased fully construction from bankrupted producers. The roll up has proven successful for Poet. With twenty dry-mill plants in operation, Poet produces one billion gallons of ethanol per year.

Poet has been working on new technologies, trademarked
BPX and BFrac, that remove fiber from the corn kernel and uses proprietary enzymes to convert raw starch to ethanol. The use of enzymes eliminates the cooking step in the conventional distillation process. Last year Poet announced the achievement of 20% ethanol concentration, which the company claims is twice the industry standard.

Of course, Poet is still working on commercializing its cellulosic technologies. The company is getting a boost from the U.S. Department of Energy with an $80 million grant. Poet will use the money for expansion of its
Emmetsburg, Iowa plant where it expects at least 25% of ethanol output will come from a cellulosic production line. The plant is expected to cost at least $236 million and take over two years to complete. When completed, the plant will have a 125 million annual production capacity.

There are critics of such grants who argue that ethanol costs too much to product for it to ever be a viable alternative to fossil fuels. It is important to remember that nuclear utilities and the oil and gas industry have continued to receive favorable treatment through subsidies and tax breaks long after the early development of both industries. Perhaps if those industries had to compete on level ground, ethanol would not need grants and subsidies either.

Putting the issue of grants and subsidies aside, cellulosic ethanol costs more to produce than corn-based ethanol because of the extra extraction steps need to set up the fibers for processing. Poet representatives estimate that at the current state of technology it takes approximately $1.00 more per gallon to make ethanol from cellulose. Poet is working to reduce that figure with great processing efficiency.

Poet is also working to reduce energy input requirements by recycling wastes as biofuel. Indeed, Poet expects to reduce its natural gas needs by as much as 85%.

This is a wonderful tale, but leaves most investors out in the cold. Poet is a private company…at least for now. The lobby of the Poet corporate office was busy during our visit with suppliers, investors and scientists. The chief financial officer makes frequent trips to financial centers like New York. Investors should watch closely for a move to issue common stock to the public.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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