Texas Green Gold

Algenol Biofuels, Inc. (Private), a Florida-based developer of biofuel technology is another recipient of the Department of Energy grants aimed at promoting both the economy and alternative energy. Algenol will receive $25.0 million from the DOE to match its own $33.9 million in capital to support a project to produce ethanol from carbon dioxide and seawater using algae. The planned ethanol plant is to be located in Freeport, Texas and is planned to produce as much as 100,000 gallons of ethanol per year.

Algae present an attractive workhorse for biofuel production in as much as there are few special interest groups championing their freedom. There are thousands of species of algae available for drafting into fuel production, most of which reproduce and grow rapidly. They are highly efficient photosynthesis machines. Furthermore, they have large sugar storage capacity. After all, in the switch from fossil fuels we are really looking at an alternative, quick fix for the storage and compression of the suns energy, i.e. photosynthesis.

Algenol is using algae technology developed at the University of Toronto in the late 1990s. Since then the company claims to have made advances that has rendered the algae more tolerant to high heat and high salt and alcohol content. They are using blue-green algae that have been metabolically enhanced. Algenol claims their algae can produce ethanol at a rate of 6,000 gallons per acre per year. The goal is to reach 20,000 gallons. This compares to 500 gallons per acre per year from corn

Algenol is still in a developmental stage, limiting investment opportunities. So far the company has been “privately funded” and management has been somewhat circumspect about its financial supporters. The company has had no difficulty in forming strong partnerships with such strong players as Linde Group in Germany and Dow Chemical.

We view Algenol as a company to watch for a future IPO. The DOE grant may prove to be a key enabler of this compellingly elegant science story.


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.

Happy New Year

If it didn't bring you joy,

just leave it behind.

Let's ring in the new year

with good things in mind.

Forget every bad memory

that brought heartache and pain,

And let's turn a new leaf

with the smell of new rain.

Let's forget past mistakes

making amends for this year.

Sending you these greetings

to bring you hope and cheer

Happy New Year!

Large Fry Largesse

The Department of Energy (DOE) was generous to the large as well as small fry in its biofuel grant awards. Archer Daniels Midland (ADM: NYSE) was awarded $24.8 million to match its own investment of $10.9 million in a project to produce ethanol and ethyl acrylate using acids to breakdown biomass as part of a pretreatment step. The compound ethyl acrylate is used in the production of plastics, adhesives and coatings among other materials. In addition to this chemical and ethanol fuel, the project is expected to produce non-polluting by-products that can be returned to the soil.

ADM is not a newcomer to the sustainable energy production scene. Indeed, public filings and public relations releases tout the company’s leadership in renewable fuels. For example, ADM’s press release announcing the DOE grant award devoted two paragraphs to outline ADM’s cooperative efforts with agriculture equipment producer Deere & Company (DE: NYSE) and Monsanto Company (MON: NYSE) to develop “sustainable biomass collection and transportation” capabilities.

ADM reported $2.7 billion in cash on its balance sheet at the end of September 2009. Its shares trade at 17.7 times trailing earnings and 11.0 times the consensus EPS estimate for 2009. This compares to 25 times in the agriculture industry. We estimate the company’s cost of capital is near 9.0% versus 8.3% return on its equity.

This project will be among the most interesting to watch over the next couple of years. Not only is the science behind the acid-based process under scrutiny, taxpayers and investors alike should be asking why ADM needed the U.S. government to fund two-thirds of the project. With a respectable valuation in the public equity market and a relatively strong earnings multiple, ADM should be eager to finance any viable biofuels project on their own.

With such significant capital resources, why is ADM management unwilling to take the risks associated with a project that requires less than 2% of the company’s cash resources to complete? If ADM’s research scientists and product development engineers could not figure out this acid-based process, who can? Perhaps the project is too risky for U.S. investors as well.


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.