Tuesday, September 06, 2011

Careful Parsing of Words

“We harness the power of microalgae to yield substantial volumes of oil and bioproducts…. We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the advanced biofuels industry.”     

Solazyme, Inc. Initial Public Offering Circular, May 27, 2011

These were big claims by Solazyme, Inc. (SZYM:  Nasdaq) in its debut as a public company earlier this year.  During the road show with institutional investors, Solazyme management described a commercial-scale production capacity made available to the company through contract manufacturers and a new facility purchased in May 2011.  The company claims to have already produced over 500,000 liters of oil using its proprietary tailor-made microalgae.  

We are certain that at least 80,000 liters were produced since that is the amount of marine fuel produced for the U.S. Navy.  What is less certain is the ability of the Solazyme to transition to larger scale production.  The company had been producing test quantities at contract facilities that held a capacity of 75,000 liters.  In May 2011, Solazyme bought a facility with several 128,000-liter fermenters providing annual production capacity of over 2.0 million liters.

We have covered in previous posts how precarious scale-up can be for these living factories.  The verdict is still out on whether Solazyme’s “designer” microalgae will thrive in a large-scale environment.  Indeed, the IPO offering circular cited scale-up production and yields as two of the risk factors for Solazyme’s business.

At this juncture Solazyme has been careful about making too many yield claims.  While it has not put oil yields into print, Solazyme has made claims related to the fatty acid content of its oil.  The company claims that it has succeeded in increasing the concentration of capric, lauric and myristic fatty acids by 20% compared to palm kernel oil.  It also claims that its oils have less oleic acid content. 

Investors will need to wait until the Company has had some time in the new Peoria, Illinois production facility to determine whether Solazyme can deliver on its road show promises for total production. 

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.  SZYM is included in Crystal Equity Research’s Beach Boys Index in the Algae Group.

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