Friday, January 27, 2012

Ethanol IPO

Can it be?  An initial public offering of an ethanol producer?  Yes, in mid December 2011, Pennsylvania-based Coskata, Inc. filed a registration statement to raise $100 million through the sale of common stock.  Coskata needs capital to build a production facility planned for Boligee, Alabama that is supposed to initially produce 16 million gallons of ethanol per year.  Eventually Coskata hopes to boost capacity to 78 million gallons per year.

Coskata expects to turn wood chips  -  there is plenty in Alabama  -  into ethanol with a process that combines elements of both the conventional biochemical and thermochemical methods for producing ethanol.  Management claims this makes the process more efficient and less costly.  The first step in Coskata’s proprietary process involves the conversion of feedstock to syngas, which makes more energy-yielding carbon available down the line.  Coskata claims its process yield exceeds 100 gallons per bone dry ton of softwood.  That is impressive.

Next the syngas is fermented by micro-organisms.  The little critters are apparently less expensive than the fancy catalysts producers by Codexis, Inc. (CDXS:  Nasdaq), Mascoma (private), Virent (private) and others.  A continuous process is also key to low cost.  That is just what Coskata has planned for Boligee.  The company claims a $1.50 unsubsidized cost of $1.50 per gallon for its ethanol output.  Given the ethanol is selling for more than two bucks per gallons, it sounds promising. 

Coskata is starting small with the $25 billion ethanol market.  Ultimately its ethanol can be further processed into ethylene (another $150 billion market) and propylene (another $100 billion market).  Market opportunity is not among Coskata’s challenges. 

Citigroup, Barclays and Piper Jaffray are joint book runners for the deal.  An amended offering circular was filed January 27th.  Expect the usual comment period and adjustments, then the roadshow in the next couple of months.  Estimates for revenue and costs will likely be a part of the pitch.  In the meantime, we are adding Coskata to our Beach Boys Index in the Cellulosic Ethanol Group.

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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