Friday, August 24, 2012

Blue Sugars: Not Blue, But Certainly Sweet

My home state of South Dakota has been at the heart of ethanol development.  South Dakota State University has been a key source of support for development of ethanol processes since the 1970s.  It is home to Poet, one of the largest privately held ethanol producers in the U.S. and a number of other significant ethanol producers operate plants in the state.  Now this sparsely populated state has some new bragging rights in Blue Sugars Corporation (formerly KL Energy Corp. trading under the symbol KLEG), which recently racked up the first Renewable Identification Number for its cellulosic ethanol production.

If Renewable Identification Numbers or RINs are not a part of your lexis, let me explain they are serial numbers signifying credits that are awarded when a gallon of renewable fuel is placed on the market.  The serial number is tracked through the supply chain and ultimately used by consumers of fuel to prove they are in compliance with renewable fuel mandates.  Once the renewable fuel is blended into gasoline, the credit is peeled away and can trade separately as an environmental credit.

Blue Sugars has been operating a demonstration plant in Upton, Wyoming, just a few hundred miles from headquarters in Rapid City, SD.  The Company’s chemists have apparently tweaked enzymatic hydrolysis and prodded yeast propagation in addition to fine tuning the rest of the steps needed to turn sugarcane bagasse or woodchips into ethanol. The company claims 90 gallons of ethanol from every dry metric ton of certain biomass feedstock.

Petrobras, SA has been a development partner over the last several years and has recently licensed Blue Sugars’ process.  Petrobras plans to use the process in its sugarcane mills in Brazil.  That spells new revenue for Blue Sugar as Petrobras ramps up production.  Blue Sugar under its former name, KL Energy went private late in 2011 and no longer reports financial results to the SEC.  The company reported $3.1 million in revenue in the first nine months of 2011 from engineering and product development services, but its operating loss was $5.2 million.

Blue Sugars had received financial support from Petroleo Brasileiro SA, which put $11 million into Blue Sugars’ Wyoming demonstration plant.  Now there is a new development partner in the mix.  St1 in Finland is working with Blue Sugars to make cellulosic ethanol from woodchips.  ST1 operate seven ethanol plants in Finland and has its feet on the ground in Sweden as well.

Successful demonstration plant! New licensee!  New development partner! First RINs!  The company has made progress where others seem to have failed.  

The U.S. Department of Energy has estimated that cellulosic ethanol production will reach 6.9 million gallons in 2012, well short of a goal of 500 million gallons set five years ago.  DuPont’s Danisco Cellulosic Ethanol partnership is focusing all its efforts on a new plant in Iowa and will not produce at its Tennessee plant this year.  Fulcrum Bioenergy and Terrabon are just flat out do not have their plants ready to produce.  Ineos, KiOR (KIOR:  Nasdaq) and ZeaChem had pledged to deliver cellulosic ethanol, but so far have been no-shows in the marketplace. 

Although no longer accessible to minority investors, Blue Sugars is worth keeping on the radar screen.  Small and low-profile, Blue Sugars is making tangible progress where other more high-profile companies with cellulosic aspirations have fallen short.  How can management be blue under such favorable circumstances?  Indeed, its accomplishments must seem very sweet.

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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