Tuesday, June 28, 2011

Gevo's Cocktail

With a fancy cocktail called isobutanol, Gevo, Inc. (GEVO:  Nasdaq) is determined to distinguish itself from the rest of the renewable energy market.  Like so many of the most recent entrants into the renewable energy and chemicals industry, Gevo is using a proprietary yeast biocatalyst, which converts sugars derived from multiple renewable feedstocks.  Gevo has trademarked its proprietary GIFT platform, which is designed to bolt directly into existing ethanol production. 

Gevo’s technology platform turns out isobutanol, a four-carbon alcohol that has potential as a building block for fossil fuel substitutes.  Isobutanol especially is noteworthy because it can be processed into some highly valuable finished products such as jet fuel and feedstocks for the production of synthetic rubber, plastics, and polyesters.  All of these commercially vital materials are currently dependent on petrochemicals.

Gevo has been successful in securing a string of strategic and license arrangements.  ICM, Inc., Cargill, Inc., Mustang Engineering, Inc. and Toray Industries, Inc. are all on GEVO’s best friends list.  The license of Cargill’s microorganism technology may be the most important, as this enables isobutanol production in the GIFT platform.  The Toray relationship promises to give Gevo a foothold in the recyclable PET (polyethylene terephthalate) market that underpins plastic container production.

The company’s base of technology is protected by over 250 patent awards and pending patent applications.  It is in part the promise of this fortress that has helped hold the stock near its IPO price despite a choppy market and weakness in the ethanol market.  In February 2011, Gevo raised $100 million through an offering of 7.2 million shares at $15.00 per share.

Investors may pale at the losses Gevo has reported.  The loss in the most recent twelve months was $10.55 per share.  Furthermore, some of its alliances are held together by non-binding agreements.  Nonetheless, a rating upgrade by one of Gevo’s investment banking sponsors has helped boost confidence in the company’s future despite the red ink.

When looking at companies like Gevo we believe investors need to consider the advantages that accrue to early movers like Gevo.  The future of the chemicals sector appears clear.  It is more likely than not that companies like Gevo with novel renewable technologies could ultimately be powerful players in the new non-fossil fuel economy.

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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