Tuesday, March 16, 2010

A Better Mouse(trap)

You would be wrong, if you thought after over a dozen posts in this series on the Department of Energy grants for renewable fuels projects that the DOE would eventually get its fill of ethanol. The DOE spread some of the “green” joy to ZeaChem, Inc., a private ethanol producer in Boardman, Oregon. The $25.0 million grant must be matched by $48.4 million from ZeaChem.

The company plans to build a cellulosic-based “biorefinery” to turn hybrid poplar trees into fuel-grade ethanol at the rate of 1.5 million gallons per year. They will also test some agriculture residues and other energy crops.

Before getting too critical of yet another ethanol project on public welfare, it is worthwhile looking at the technology that underlies ZeaChem’s proprietary platform. It is a dual process that puts the feedstock through both biochemical and thermochemical steps.

In the biochemical step, instead of using yeast to induce fermentation, ZeaChem uses a microorganism called acetogen that generates acetate in its natural anaerobic or no oxygen respiration. The acetogens are content to work in harsh environments (it freezes in Oregon) and produce no carbon dioxide. The latter achievement alone should get investors holding shares of corn-based ethanol producers to sit up and take notice.

In the ZeaChem biorefinery platform the acetogens produce acetic acid and have been achieving 50% higher fermentation yields than corn-based process. Investors could even stand and applaud if that claim is fulfilled. Acetogens are so successful compared to yeast used in the fermentation process because acetogens can ferment xylose with ease. This is why most other cellulosic ethanol platforms have a step to convert the xylose (wood sugar) in cellulosic feedstocks like corncobs and straw that is yeast-friendly.

This high efficiency rate is part of what is allowing ZeaChem to use the unlikely poplar tree as feedstock. Of course, these are not just any poplar. ZeaChem plans to use residues from fast growing hybrid poplars. A leading tree producer GreenWood Resources has been contracted to supply residual fibers from its tree crop.

Given the localized nature of renewable fuel production, having a viable non-fossil fuel source in the northwest U.S. make a great deal of sense. Oregon’s climate is not friendly for corn, sugar cane or jatropha. A few years ago Oregon State University published its economic analysis for biofuel production in the state and warned that under current technologies the net energy of biofuel produced in Oregon might be expensive. The report recommended wood cellulose could produce the greatest net energy after fuel product and transport costs were considered.

No minority investment is possible here even for accredited investors as it seems ZeaChem is generously supported by a group of hedge funds and Valero Energy (VLO: NYSE). That said, with success in this project, it seems a public offering is a likely exit strategy. ZeaChem appears to have come up with a better mouse trap - or are those acetogens a better mouse? As such it is a company worth watching.

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

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