Friday, July 08, 2011

Big Talk Turns to Whisper

Management of KiOR, Inc. (KIOR:  Nasdaq) and its bevy of investment bankers talked big in the weeks leading up the company’s initial public offering in late June 2011.  The deal would be priced between $19.00 and $21.00 per share they said, potentially giving the company $210 million in proceeds.  A self-proclaimed renewable fuels operation, KiOR needs the money to commercialize and perfect its proprietary technology platform to convert non-food biomass into hydrocarbon-based oil.  However, as the month drew near end, the big talk turned to a whisper and the deal was priced at $15.00 per share.  KiOR received a smaller but still ample check for $150 million.  Another $22.5 million will come KiOR’s way if the underwriters’ overallotment option is exercised.

KiOR was talking big because they think they are “fundamentally different” from conventional fossil and biofuel companies.  Of course, this simply means that they make hydrocarbon-based fuel from recent photosynthetic processes rather than relying on the highly concentrated forms in drilled oil and coal, a difference that can also be claimed by other renewable fuels companies.  There is nothing new or particularly special about this claim, providing some understanding for why institutional investors turning down the volume on KiOR.

KiOR’s end products are fungible gasoline and diesel blendstocks rather than alcohols or fatty acid methyl esters (FAME), such as ethanol or biodiesel.  This does make them different than many of the other biofuel or renewable fuel companies in the market.  The problem is during a road show the first mention of “fatty acid methyl esters” sends investors to their Blackberries to read e-mail.  Worse, most traders only understand “fungibility” in the context of cash in their own portfolio.

For its commercial debut KiOR plans to feed yellow pine chips into its proprietary reactor and catalyst system.  Its claims its demonstration refining unit has achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass.  Management is targeting an unsubsidized production cost below $1.80 per gallon in a planned production facility with the capacity to process 1,500 bone dry tons of feedstock per day.  The math provided during the road show was based on an estimated unsubsidized production cost of $550 per metric ton, $0.50 per liter and $1.10 per gallon of ethanol equivalent. This per-unit cost assumes a price of $72.00 per bone dry ton of the pine chips.

It is a system that can be replicated in other markets where pine chips or similar feedstock is available.  Part of the IPO proceeds will be used to create efficiencies in the process, including the latitude to use lower quality wood chips and residues.  Achievement of this goal will broaden the business model in both depth in each location and geographic breadth.

The IPO price was more appealing that the initial price discussion.  However, it may be worthwhile for investors in the secondary market to wait for any pullback before jumping into KIOR.  If KiOR can make good on its big talk, the unsubsidized renewable fuel business model will present a compelling case for investors.

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. KIOR has been added to the Crystal Equity Research Beach Boys Index in the Renewable Fuels group.

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