Gevo in the Wind

Gevo Wind Towers

Renewable energy purists can look more favorably on Gevo, Inc. (GEVO:  Nasdaq) after this week as the company reduces its own carbon footprint with wind technology.   On May 1st Gevo will commission two wind generation towers at its Luverne, Minnesota renewable fuel production complex.  Up to this point Gevo had been buying electricity from the grid in Minnesota, which means a coal-fired power supply.  Gevo turned to another Minnesota company, Juhl Energy (JUHL:  Nasdaq), to build and operate the wind power installation. 

The two wind turbines will have a combined capacity to supply up to 5.0 megawatts of electricity to Gevo’s isobutanol plant in Luverne.  The new electricity supply source will earn Gevo a lower carbon intensity score under California’s Carbon Fuel Standard.  Excess output will be sold to Missouri River Energy Services, the local electric utility.

Most investors are probably just worried about Gevo sales and profits.  The company has crafted a proprietary yeast that is used as a catalyst for a fermentation process to produce isobutanol and its derivatives.  Isobutanol occurs naturally in the ripening and decay of fruit.  Commercial scale ethanol fermentation also kicks off isobutanol.  Gevo favors isobutanol as an end-product because it has numerous applications as an intermediate chemical as well as a fuel additive.  The company also sells distillers grains as a by-product, which is an interesting supplement to Gevo’s top-line given that its feedstock is largely otherwise inedible corn. 

Gevo Complex at Luverne, Minnesota

In the full year 2019, Gevo reported $24.5 million in total sales of its isobutanol and its derivatives.  Unfortunately, the company has not reached sufficient scale to turn a profit.  The net loss in 2019 was $28.7 million or $2.35 per share.  To support operations Gevo dipped into its bank account for $20.8 million in cash.  At that pace of ‘cash burn’ and given that there was only $16.3 million in total cash on the balance sheet at the end of December 2019, the company will run out of cash before the end of 2020. 

The company is scheduled to report financial results for the first quarter ending March 2020, on May 12^th.  Most likely cash resources to support operations will be a topic of discussion.  In early April 2020, Gevo announced that Citigroup had been engaged to explore financing options.

Isooctane for use in jet fuel is one of the isobutanol derivatives.  In December 2019, Gevo inked a ‘take or pay’ agreement with Delta Air Lines for its isooctane. Most likely management is hoping Citigroup can use that agreement to kick loose enough capital to pay for an expansion of its Luverne facility.  Gevo could probably also benefit from additional working capital to fulfill the terms of the Delta contract.   

There could be a delay to Gevo’s plans.  The company suspended operations at its Luverne plant and let thirty employees go.  The production halt appears to be as a consequence of weakened demand caused by the coronavirus and not directly by government work stoppage or stay-at-home orders.  Gevo is likely to get queried at its earnings conference call on what conditions could trigger a resumption in production.

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.