Tuesday, July 19, 2011

Grass Grows Greener

Ceres calls itself an energy crop company, part of the vernacular of 21st century energy production.  According to the company grass does grow “greener” on its side of the fence  -  greener because its grass are purportedly low-carbon and outside the food chain.  The company plans to sell its very “green” grass to ethanol and other biofuel producers.

The company filed a registration statement with the SEC in May 2011, for an initial public offering of its stock.  The $100 million capital raise is intended to support the company’s plans for further grass seed development and commercialization efforts. 

Ceres has already sold sweet sorghum seeds in Brazil and switchgrass and high biomass sorghum seeds in the United States under its brand, Blade Energy Crops. No doubt its largest market opportunity is in the Brazilian ethanol market, which currently uses sugarcane as its predominant feedstock.  Ceres believes that its sweet sorghum can be a “drop in” alternative to sugar cane, which is under supply constraints in Brazil.  A big plus for Ceres seeds is that they have been crafted to grow in marginal land and have tolerance for high-salt soils, limited requirements for nitrogen-rich fertilizers and are drought resistant.

By focusing on dedicated energy crop seed production, Ceres does not have a great deal of direct competition.  Other companies have developed germplasm or plant traits.  In contrast Ceres has focused on grasses that can be used exclusively for energy production.

The company has earned revenue on seed sales, but is still recording significant losses.  The total net loss in the twelve months ending August 2010 was $22.6 million on $6.6 million in total sales.  The first six months of fiscal year 2011 was a loss of $11.5 million on $3.3 million in sales, suggesting that this is not much momentum in sales.  Furthermore, it appears the company has not let up on spending.  Any investor stepping into the IPO should expect continuation of this aggressive strategy.  Indeed, experience suggests that fortified with new capital management teams tend to get even more aggressive.

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. Ceres is included in Crystal Equity Research’s Beach Boys Index.

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