Friday, August 01, 2014

Sweetwater Energy: A Tasty Litte Nugget?

At the end of last year Sweetwater Energy inked an agreement with Pacific Ethanol, Inc. (PEIX:  Nasdaq), an ethanol producer based in California, supply Sweetwater’s sugars for Pacific Ethanol to turn into fuel.  This is all the fashion now in the ethanol industry.  Forget about expensive corn for feedstock.  Ethanol producers have turned to beet sugars and even the industrial sugars like those made by Sweetwater. 

Pacific Ethanol’s plant in Stockton, California has a production capacity of 50 million gallons of ethanol, but Sweetwater will supply enough sugar for just a fraction of the total capacity.  Still that presents considerable demand for Sweetwater.  No one is popping any champagne corks because Sweetwater still has to construct its own production capacity. 

Sweetwater has applied for patent protection for its sugar producing process.  The company claims scientists from MIT have verified their success in turning wood wastes and other plant matter with plenty of cellulose into C5 and C6 sugars.    The largest component of plant matter is lignocellulosic material, which is a combination of lignin, cellulose and hemicellulose. Cellulose and hemicellulose are a long chains of polymers made up of individual sugar molecules.  When acids or enzymes are applied to these long chains they are turned back to their constituent sugars.  The polymer chain split into six carbon sugar called C6 for short and five carbon sugar or C5. We know C6 as glucose and C6 as xylose.

The names might not mean much to investors, but to ethanol producers they are music to the ears.  Fermenting both C5 and C6 sugars has been proven to increase cellulosic ethanol yield by 40% to 45%.  That puts money in their pockets.

Sweetwater may have figured out a way to put some money in its pockets as well.  It has taken its sugar ‘know-how’ beyond biomass.  Sweetwater scientists have been exploring the waste carbon dioxide as a feedstock for their sugar producing process.  In October 2013, the company entered into a joint venture with Naturally Scientific based in the U.K.  Naturally Scientific has already been working on a modular manufacturing platform to produce sugars that can be used as biodiesel or bio-chemicals.

It seems more likely than not that investor will hear more from Sweetwater Energy in the coming months.  It is a small, early stage company, and the field seems crowded with many aspiring industrial sugars developers.   Indeed, it is the crowd that is providing some validation for Sweetwater as announcements of scientific accomplishments by this or that developer provides confirmation that the group in on the right track.  It is doubtful that advanced biofuels will be a one-solution industry even if the natural process of maturation leads to sector consolidation.  Sweetwater’s technology has a value whether it commercializes that technology itself or sells it to the highest bidder.  It is well worth watching to see which larger, more financially capable company might see Sweetwater as a tasty little nugget and gobble it up.

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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