Capital for Carbon Capture

As is often the case in business, one person’s foolishness, is opportunity for another.  So it goes with carbon dioxide emissions.  About 21 billion metric tons of carbon dioxide are released each year through the combustion of fossil fuels.  Nature absorbs about half of that into leaves, grass, soil and water.  The rest ends up in the atmosphere, where it merges with other gases like ozone, methane and nitrous oxide to form an insulating cocoon around the planet.  As the sun heats the air during the day, it cannot escape through the gas cocoon, creating a ‘greenhouse’ effect.  The more fossil fuel burned, the more CO2, the greater the greenhouse effect and the more worrisome CO2 emissions become.

For Illinois-based LanzaTech all that harmful CO2 is just so much more feedstock for its carbon recycling technology.  The company is somewhat circumspect about its process.  Basically CO2 emissions are captured by the system at its source such as an industrial chimney or municipal solid waste incinerator.  Bacteria are introduced to the CO2 feed in some sort of reactor to convert the CO2 to ethanol, acetone and isopropyl alcohol.  In the past, LanzaTech discussion had mentioned something about microbes from rabbits, but bunnies are not a part of the company’s corporate promotion these days.  What is very much the buzz about LanzaTech these days is a $72 million investment by Novo Holdings AS.  

Proprietary Process

Other than the reference to rabbits, the LanzaTech solution probably does not feature any technology that has not been used by others.  After all, fermentation of sugars with yeast has been around for a long time.    Nonetheless, in June and July 2019, LanzaTech received patent protection for the microbes as well as the fermentation and electrolysis methods for cultivating them.

Even with patents to protect their intellectual property, LanzaTech still needs a profitable business model.  As with any CO2 conversion technology, commercial success often means a reduction in cost for a partner or an incremental new revenue stream from consumers.  

Road Littered with Failures

 Not every carbon capture company has been commercially successful.  For example, Carbon Engineering in Canada is using hydroxides of potassium and calcium to convert atmospheric CO2 to calcium carbonate.  There are applications for calcium carbonate in agriculture and industry, but Carbon Engineering’s system does not produce it at a cost level that makes its product competitive.  Processing the calcium carbonate in another step to recover pure CO2 for industrial use is even less economic as it requires significant energy.   Even Occidental Petroleum, a key investor in Carbon Engineering, has not been able to economically deploy the refined CO2 product in an oil recovery method that pumps CO2 into nearly depleted oil wells. 

The economics of its hydroxide chemistry could be improved if Carbon Engineering abandoned its goal of reducing atmospheric CO2 to a more concentrated source like high-emitting industries with a need to build a ‘green’ reputation.  Alternatively, it could seek end-markets where selling prices are higher.

Foothold in Steel Industry

LanzaTech has already reached both points in the evolution of their business model.   The company has located its CO2 capture system at steel mills in China and Belgium.  In May 2018, the company started up its first commercial system at the Jingtang Steel Mill in Hebei Province China.  The ethanol produced at the steel mill is chemically identical to sugar-based ethanol and it meets ASTM International standards for blending with gasoline or conversion to jet fuel.  The co-located plant has the capacity to produce 16 million gallons of ethanol per year.

A plant co-located at a Arcelor Mittal steel mill in Ghent, Belgium is envisioned to be smaller with an output of 80 million liters (21.1 million gallons) of ethanol per year.  Construction is expected to require two years, with first production sometime in 2020.

Taking its Case to Consumers

LanzaTech is not relying exclusively on low-cost feedstock and ‘green’ credits for its industrial partners.  The company is also counting on consumers choosing premium products made with recycled carbon rather than products made with petroleum newly pumped from the oil field.  The recent capital raise will support commercialization of LanzaTech’s recycled carbon products under the brand Carbon Smart. 

Novo Holdings is bringing more to the table than just capital.  It owns Novozymes, a developer of enzymes and microbes to improve agricultural and industrial processes.  Novozymes knows a bit about microbes, from rabbits and all sorts of places.  Importantly, they know about a particular chemical called ethylene that can be produced by dehydrating ethanol, a base product in which LanzaTech has already become proficient in producing from CO2.    

Why should investors be excited about ethylene production?  It is an essential building block for a wide range of chemicals from plastics to antifreeze to solvents.  There are about 135 million metric tons produced each year, usually by steam-cracking petroleum feedstock.  In the room where this article is read, there will likely be very few items that do not have some ethylene incorporated somewhere.  MarketWatch values the ethylene market at $137 billion worldwide.

If LanzaTech can offer Carbon Smart ethylene to the market at an economical price, it could be a big winner for the company and all its investors.  Consumers might be willing to pay well for products that have recycled carbon at their core, knowing it means CO2 that once might have gone up into the atmosphere as a greenhouse gas is now recycled into tableware or toys or clothing.  

Getting a Stake in CO2 Recycling

Investors are left out in the cold for now as far as LanzaTech is concerned.  The capital from Novo Holdings is likely to tide the company over for awhile.  This was fifth round of venture funding for LanzaTech, including an earlier investment by the venture arm of the largest chemical producer in the world, BASF (BASF:  TI).   With technology largely proven and now protected by patents and capital to jump start market penetration with commercial products, it seems likely that an initial public offering could be LanzaTech’s next step in its capitalization. 

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.