Tuesday, June 29, 2010

Palm Oil Partners

The Department of Energy granted private biofuel developer Elevance Renewable Sciences, Inc. $2.5 million to set up a demonstration scale biorefinery that can produce specialty chemicals and biodiesel from various feedstock sources. The demonstration scale plant is to be used to evaluate feedstocks and recycle streams and then develop a process model for commercial scale production.

Elevance has made considerable progress since the beginning of 2010, including the completion of a pilot-scale laboratory unit. Yesterday, the company announced a joint venture with Wilmar International Ltd. to build a commercial-scale biorefinery. The duo plans to use Elevance’s proprietary biorefinery technology to produce green olefins, esters and acids as well as oleochemcials and advanced biofuels. Wilmar, which is an agribusiness based in Asia, will supply the feedstock from Wilmar’s existing operations. Wilmar produces palm oil and by-products.

The integration of renewable fuel production with feedstock production is becoming a well recognized solution to improve the economics of biofuel production. We expect to see more and more biofuel partnership like those of Elevance and Wilmar. Investors are left out of the loop in most of these partnerships, which for the most part are still early-stage, private companies.

Shares of Wilmar trade on the Singapore exchange under the symbol WLIL. The stock trades at 14.5 times earnings compared to its peer group, which averages 21.6 times earnings. Wilmar reported a net margin of 5.6% in the trailing twelve months. This compares relatively well to its peer group, which averages a net margin of 4.5%. Wilmar is more leveraged than the group, but generates substantially higher return on equity. We like feedstock owners as a vehicle to play the renewable fuel sector, particularly those that have the foresight to negotiate partnerships with technology owners that have solved the primer energy and transport conundrums that have stymied the ethanol industry.

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.

$WLIL #Energy

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