Friday, February 24, 2012

Texas Cows Inspire Terrabon BioFuel

A self-described technology transfer company, Texas-based Terrabon (private) may be anything but the sidelines player seen in most technology licensors.  As CEO Gary Luce described Terrabon's progress in a recent phone conversation, I could not help thinking Terrabon is headed down an operational track as a biofuel producer.

These days Luce and his team are waiting for approval of a loan guarantee by the U.S. Department of Agriculture. Loan proceeds will be used to build production facility that will turn municipal waste into jet fuel among other transport fuels.  Luce suspects the Solyndra debacle in 2011 slowed the decision-making process at the USDA, but he is still hopeful an approval is around the corner yet in 2012.  That would make it possible to initiate production in 2014 in the new facility designed to produce five million gallons of acetic acid per year.

Terrabon’s process has the usual fermentation tank in its demonstration plant, which has been operational since 2009.  Not surprising for a company based in Texas, Terrabon based its production process on the wonders of a cow’s stomach.  Cows are ruminants with four stomachs that do a phenomenal job in converting cellulosic matter like grass into organic acids.  Terrabon’s patented process uses a mixed culture based on muck from the sea coast in the fermentation step.  The acetic acids produced in Terrabon’s fermentation tank are converted to ketones and then to mixed secondary alcohols through a process called hydrogentation.  The final step called oligomerization knits together the secondary alcohols into higher order alcohols with more carbon components, including drop-in renewable jet fuel.

Even if the USDA comes through with a loan guarantee, proceeds from the ensuing loan will only support the construction of an intermediate production facility.  Terrabon will need additional capital to reach commercial scale production.  A facility capable of producing 15 million to 17 million gallons of fuel per year is in the planning stages.  So far the price tag is estimated at $150 million.  Luce appears content to troll the private equity market for capital, leaving the initial public offering option on the table for a day when Terrabon is nearer positive cash flow.

I expect Terrabon to raise at least one more round in the private equity market and submit more applications for funding from various federal and state programs.  For example, the company has been the recipient of support from Defense Advanced Research Projects Agency (DARPA).  Also solid waste handler Waste Management, Inc. (WM:  NYSE) and oil refiner Valero Energy, Inc. (VLO:  NYSE) are strong supporters  -  and potential joint venture partners.  Waste Management stands to gain from the cultivation of downstream demand for its wet waste volumes.  Like every other refiner, Valero has a keen interest in sourcing drop-in renewable fuels.  Finding a renewable fuel source near its refineries in Texas and Louisiana is just that much more appealing. 

With deep pocketed friends like Valero and Waste Management, its seems more likely than not that Terrabon can continue in the private mode for several more years.  I plan to continue watching.  Terrabon is included in Crystal Equity Research's Beach Boys Index in the Waste-to-Energy 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.

No comments: