Tuesday, September 21, 2010

Off the Shelf

In late June 2010, Zeachem announced achievement of a milestone at its Boardman, Colorado biorefinery - the successful production of ethanol at a capacity that can be scaled to commercial production. Back in December 2009, the Department of Energy awarded Zeachem a $25 million grant to support that objective.

Using standard equipment and off-the-shelf catalysts, ZeaChem produced ethanol from ethyl acetate through a process called hydrogenation. This is apparently common industrial practice which Zeachem claims is readily scaled to commercial levels. Now the company has to integrate the two steps of making ethyl acetate and then ethanol.

In early June, the company broke ground on the biorefinery, which is expected to have a 250,000 gallon per year capacity. This suggests Zeachem is among those who are right on target with their DOE grant-supported project. We did not get a confirmation from Zeachem on whether any new jobs were created specifically through the grant. However, it is clear the infusion of financial resources is helping Zeachem move forward with both engineering and hiring.

Zeachem describes itself as a cellulose-based biorefinery. It has tweaked the process for some savings on production energy. After fractionating the biomass - some cellulosic-rich feedstock - the sugar stream goes through a fermentation step where an acetogenic process is utilized to ferment the sugars to acetic acid without carbon dioxide as a by-product. The acetic acid is converted to an ester which can then be reacted with hydrogen to make ethanol. To get the hydrogen necessary to convert the ester to ethanol, ZeaChem takes the lignin residue from the feedstock and gasifies it to create a hydrogen-rich syngas stream. The hydrogen is separated from the syngas and used for ester hydrogenation and the remainder of the syngas is burned to create steam and power for the process.

By combining the two processes about 2/3 of the energy in the ethanol comes from the sugar stream and 1/3 comes from the lignin steam in the form of hydrogen. Zeachem also notes that traditional yeast fermentation creates one molecule of carbon dioxide for every molecule of ethanol. Zeachem says this means the carbon efficiency of its fermentation process is nearly 100 for yeast.

Individual investors are left out in the cold with privately held Zeachem. The company has strong support from a handful of venture capital firms, including Firelake Capital Management and PrairieGold Venture Partners. Valero Energy Corp. (VLO: NYSE) has also take a significant stake. We expect one of two outcomes for Zeachem - takeover by a major oil and gas player such as Valero Energy or an initial public offering. However, we expect a bit of a wait until Zeachem as producing at commercial scale and shipping to customers.

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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