Gevo: The Owner's Manual

So you own some high-flying Gevo shares, or are considering an investment. What are the targets, the milestones, the inflection points?

The bulls continue to run on Gevo, and at the Digest we continue to plumb the depths of the business model, looking for answers – the secret sauce of its success. Is the rampaging stock price a function of high interest in advanced biofuels and scarce opportunities for investment, or because of its inherent elegance as a business?

Well, a bit of both, but as time goes on, definitely more of the latter. Gevo is a pretty easy business to describe. “We make isobutanol, a known molecule with a known market, and at a lower cost than you can make it from petroleum,” says CEO Pat Gruber, who not too long ago picked up the Carver Award for Lifetime Achievement from BIO.

So far, the “less expensive” part is not yet proven at scale – we’ll have to wait until Q1 of next year, when Gevo’s newly-acquired biorefinery in Luverne, Minnesota switches over from producing feed grains and ethanol, to feed grains and isobutanol. But the rest of the claim is…well, it’s all true.

Gemyris, Codexvo…er, who exactly are these companies again, and why are they distinct?

Gevo and Amyris have been run together by public investors lately, into a sort of Gemyris, companies powered by magic bugs that ferment ordinary crop-based sugars into suites of exotic fuels and chemicals that will slowly take over the world.

There are common elements, for sure. Both companies have their strong roots in synthetic biology, and both feature exotic magic bugs engineered from yeast. Both had investment roots in Silicon Valley, with Khosla Ventures in their pedigrees. Both have been rocketing up the 50 Hottest Companies in Bioenergy, with Amyris landing #1 this year and Gevo #5.  Both had celebrated IPOs this past year, and have been performing strongly in the aftermarket, with both up more than 60 percent over their debuts.

About there, the Gevo-Amyris similarities fade.

Peel back Gevo, and under the hood you find a lot of Cargill, the giant ag trading and processing company that forms the “C” in the “ABCDs” that dominate global agricultural commodity trading and corn and soybean processing. That’s Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus.

“Understanding how to maximize the value in the co-products, that’s what turned ADM and Cargill from good companies into giants,” observes Gruber, who imported a lot of Cargill experience into the design of Gevo. In particular, it was the experience of developing NatureWorks, which was originally formed in 1997 as Cargill Dow to pursue the development of bio-based chemicals and materials, that formed the Gevo base. NatureWorks launched polylactic acid (PLA), a renewable polyester used in packaging, and Ingeo fibers, onto the market and in many ways ignited the development of renewable chemicals and materials.

Gruber himself was Chief Technology Officer and a co-founder of Cargill Dow, and thence NatureWorks between 1997 to 2005. Gevo’s executive vice-preident for technology, David Glassner, and its EVP for business development, Chris Ryan, also came over from senior positions at NatureWorks; Ryan was also a co-founder as well as its eventual CTO.

That Cargill Dow backstory

Over the years, Cargill Dow (eventually renamed NatureWorks) acquired a reputation as a strong business unit, but a “slow train coming,” taking longer than expected to develop its products, and in the sense that time is money, providing less spectacular rates of return than had originally been envisaged by its founding partners. After the two partners spent $300 million launching its initial PLA plant in 2002, Dow eventually recorded a $148 million loan guarantee charge in 2004, and ultimately sold out to Cargill in 2005 after concluding that it saw no green premium in polymers made from renewable resources.

But it did establish a market-based model in its efforts – starting as it did with a focus on a target product, PLA, in their case. Gevo also began a target in mind, in its case, isobutanol. Amyris, by contrast, began with a magic bug that made a relatively novel molecule, farnesene, which they have pioneered a series of uses for.

What is different about Gevo and NatureWorks? In so many ways, Gevo has sought to retain the market focus and product excellence of NatureWorks, while reducing the money and aggravation expended on its development. Crucially, Gevo’s founders jettisoned the concept of a green premium, and sought to develop isobutanol at a lower cost than from fossil resources.

Farewell, green premium

“We targeted commercial performance,” explains Gevo CFO Mark Smith, “then identified the process. We knew that we had to be cleaner and greener, but ultimately cheaper. What trips up renewable companies is capital intensity. Hence our retrofit strategy, which utilizes underperforming assets to produce higher value product, and allows us to scale up quickly.”

How? Far more than a magic bug, Gevo developed its GIFT system, which combines three vital elements.

The Gevo GIFT system – three innovations in one

First, its magic bug that indeed, produces isobutanol at a far higher rate, yield and concentration than traditional yeasts. Second, an extraction system that gets the isobutanol out of the broth before the alcohol levels kill off the yeast. Third, a bolt-on system, utilizing almost all of the systems of existing dry mill biorefineries that were producing feed grains and ethanol.

For owners of existing mills – a higher value, lower volatility revenue stream for mill owners. For Gevo, a means of getting into business at a fraction of the cost of developing a factory from the ground up.

The Gevo system uses multiple feedstocks – Brazilian sugarcane, Asian cassava, US corn, and development of options for using cellulosic sugars are underway – timed to coincide with the eventual arrival of those low-cost cellulosic sugars in the market. For now, the company is focused on corn, as opposed to many synthbio companies that are heading to Brazil.

Gruber explains. “Our process can use dirty sugars, like those we extract from corn starch. Other processes need much cleaner sugars, at this stage, which is generally what has so many of them headed in the direction of Brazil. We can use those too, but corn offers us a lower cost of sugar.”

The targets – costs, yields, concentrations, capital

Gevo’s cost target? Backcasting to 2005-2010, corn starch-based isobutanol would have been produced at $1.09 per gallon lower cost reduction compared to petroleum-based isobutanol, according to CFO Mark Smith, who noted that “our customers can insert low-cost isobutanol in at the basic building block level, and green up that whole system, producing up to 40 percent of all of their products using bioisobutanol.

The performance targets? Concentrations of 107 grams per liter and a rate of 2 grams per liter per hour.

The capital targets? A 22 million gallon retrofit for $17M, a $50 million gallon retorfit for $22-24 million, and a 100 million gallon retrofit for $40-$45 per gallon.

Initial markets? Solvents, a $5 billion market with Sasol as a gateway partner to the market. Rubber and lubricants, another $5 billion market with Lanxess as partner. Speciality gasoline blendstocks, a $5 billion market with Total as partner, and eventually the $160 billion renewable jet fuel market with United Airlines as partner. With the solvents and rubbers, there is no added regulatory process as they are making a known molecule. With renewable jet fuel, the company is going through an ASTM certification process with a goal of qualifying by 2013. Meanwhile, isobutanol is also approved as a gasoline blendstock at concentrations of up to 12.5 percent.

Offtake contracting? To date, the company has developed LOIs which fully absorb all production online by 2015.  Meanwhile, the company has an LOI in place for second plant, producing 50 million gallons.

Business model? Gevo contributes technology, and retrofit capital. The ethanol plant owner contributes its fermentation process. The goal of each partnership? To double the EBITDA from each plant converted to isobutanol.

Capital calls? After plant three, the company is expected to need new funding, which is likely to come in the form of equity and debt combinations. Meanwhile, Gevo expects to be EBITDA positive by 2013, and recording profits by 2014.

Monster in the Making?

So, what do we have. It’ll be nine years from company foundation to operating profits, and production at scale, for a fraction of the cost of those expended in the development of NatureWorks. A lower cost product, yet clean and green – with multiple markets in fuels and chemicals.

No wonder investors are excited.

Next hurdle – the switchover from ethanol production to isobutanol at the Luverne plant in the first half of 2012.  If Gevo hits its performance targets, there’s a monster in the making.