Ceres files $100M IPO – The Complete Digest Analysis

 

"A significant increase in the price of sugar relative to the price of ethanol may reduce demand for our sweet sorghum and may otherwise adversely affect our business," says Ceres, in its IPO registration docs.

Ceres becomes 7th advanced bioenergy company to head for the public markets in the past year.

Will it fly? Should it? The risks, the rewards, the rationale.

In California, energy crop breeder Ceres has filed for a $100 million IPO on Nasdaq, with Goldman Sachs and Barclays Capital as underwriters. Ceres plans to trade on NASDAQ under the symbol CERE. The complete S-1 registration statement is here.

Shareholders of the company include entities associated with Artal Luxembourg, Warburg Pincus Private Equity, Ambergate Trust, Oxford Bioscience, Gimv, Oppenheimer Growth, Quantum Industrial Partners, SFM Domestic Investments, and Monsanto.

Ceres’ background

The company ranks #13 in the 50 Hottest Companies in Bioenergy, and is the fifth company in the top 15 to file for an IPO in the past 18 months – following Codexis, Amyris, Gevo and Solazyme. The company picked up a 2010 Biofuels Digest Award for Feedstock research project of the year (new feedstock or traits) for its development of seawater-tolerant energy grasses.

From the S-1: “We are an agricultural biotechnology company selling seeds to produce renewable biomass feedstocks that can enable the large-scale replacement of petroleum and other fossil fuels. We use a combination of advanced plant breeding and biotechnology to develop dedicated energy crops, that increase biomass productivity, reduce crop inputs and improve cultivation on marginal land.”

Background: world biofuels production to 2030

From the S-1: “According to the International Energy Agency, or IEA, biofuel production could reach approximately 112 billion gallons per year by 2030, up from 26 billion gallons in 2010. To meet these targets, the IEA believes feedstock production would need to increase to 150 million acres in 2030, up from 75 million acres in 2010. We believe quadrupling the volume of biofuels while only doubling the feedstock production acres will require higher yielding second-generation feedstocks.”

The company’s financial progress.

The company recorded losses of $10.98M for the six months ending in February 2011, down from $11.675 in the corresponding period of 2010. The company is essentially, pre-revenue, recording $9,000 in sales over the past six months. Total assets are booked at $35M, with $22M in cash and $5M in debt.

“To drive results, drive yield.”

At the Advanced Biofuels Leadership Conference in April, Ceres CEO Richard Hamilton said that “feedstock is the #1 cost in bioenergy, and to drive results, we need to drive yield.”

Hamilton told the 450 conference delegates that companies must look to low-rent land for opportunities to produce sustainable biofuels, noting that, for example, salt-intruded fields in represented the most economically advantaged and environmentally sustainable options for producing biomass at scale. Hamilton noted that most projects varied only in choosing between high-rent land and mid-rent land because of limits in the development of new energy crops to date, but said that the new generation of energy crops were making it possible to access low-rent land, that is typically not now in food, feed, fiber or fuel production.

Sugar concentration, nitrogen efficiency, water efficiency, salt tolerance

Hamilton said that advances in energy crop breeding that focused on soluble sugar concentration, nitrogen efficiency, water efficiency, and salt tolerance would have the most impact on expanding the land opportunities. Hamilton noted that driving yields and growing more biomass per acre increased project size and lowered capital costs per gallon. He also said that advanced energy crops are being bred that will reduce enzyme loads for biorefineries, thereby also reducing a major component of operating costs.

Breakout market: Brazilian sweet sorghum

The company’s IPO leans heavily on its prospects in Brazil, where growers and mills see an opportunity to extend mill operations by up to 60 days via sweet sorghum. Such an extension would add, at full capacity, as much as 10 billion gallons of ethanol production on existing land (based on current production rates across the Brazilian sugarcane industry), or a corresponding increase in sugar, cellulosic ethanol, butanol, jet fuel, renewable diesel, renewable gasoline, or baseload utility-scale electric power.

From the S-1: “We recently began marketing sweet sorghum seeds in Brazil and have sold switchgrass and high biomass sorghum seeds in the United States under our brand, Blade Energy Crops, or Blade. Our largest immediate commercial opportunity is the Brazilian ethanol market, which currently uses sugarcane as its predominant feedstock. Due to the inherent limitations of sugarcane physiology and growth patterns, Brazilian mill operators, which have an estimated 3.4 million metric tons per day of crushing capacity, can only obtain usable sugarcane approximately 200 days per year.”

Customers

Ceres customers in commercial-scale sweet sorghum planting: Boa Vista / Nova Fronteira, a joint venture of Grupo São Martinho S.A. and Petrobras Biofuels, ADM do Brasil Ltda. and Usina Rio Pardo S.A.

Ceres customers, collaborators and research testing partners in other dedicated energy crops include: UOP, Gruppo Mossi & Ghisolfi,  AGCO Corporation, EdeniQ, Hawai’i BioEnergy, Valero Services, Amyris Biotechnologies, Choren, ICM, Novozymes, and ThermoChem Recovery International

As Ceres sees itself

Strategic rationale: High Yield Density – Dedicated to Bioenergy – Suited to Marginal Land – Scalable to Meet Demand

Competitive position: Commercial Products Available Today – Attractive Business Model – Innovative R&D Technology Platforms – Extensive Proprietary Portfolios of Germplasm and Traits – Management Team with Significant Industry Experience

Strategy: Expand Presence in Brazil – Expand Strategic Collaborations to Develop and Market Cellulosic Biofuels – Expand into New Markets – Build New Relationships and Enhance Established Collaborations in the Global Biopower Market – Continue Innovation and New Product Development – Continue to Build Our Intellectual Property Portfolio

Traits developed: High Biomass – Nitrogen Use Efficiency -Water Use Efficiency and Drought Tolerance -Salt Tolerance – Aluminum Tolerance – Enhanced Conversion of Biomass to Fermentable Sugars – Altered Flower Development

The Risks

In IPOspeak: We have a history of net losses; we expect to continue to incur net losses and we may not achieve or maintain profitability.

In English: Our investors are tired of losing their money, and may wish to lose some of yours before reaching profitability.

In IPOspeak: The markets for some of our dedicated energy crops are not well established and may take years to develop or may never develop and our growth depends on customer adoption of our dedicated energy crops.

In English: If biofuels and biopower do not scale globally, we are toast.

In IPOspeak: Our crops are new and most growers will require substantial instruction to successfully establish, grow and harvest crops grown from our seeds.

In English: We hope not to be “Son of D1 Oils”.

In IPOspeak: Our seed business is highly seasonal and subject to weather conditions and other factors beyond our control, which may cause our sales and operating results to fluctuate significantly.

In English: Rain, rain, go away – and drought, drought, go away, while you’re at it.

In IPOspeak: A significant increase in the price of sugar relative to the price of ethanol may reduce demand for our sweet sorghum and may otherwise adversely affect our business.

In English: Eat Mor Chikin Sweet-n-Low.

In IPOspeak: We are at the beginning stages of developing our Blade brand and we have limited experience in marketing and selling our products.

In English: Sir Richard Branson doesn’t work here.

In IPOspeak: Our principal competitors may include major international agrochemical and agricultural biotechnology corporations, such as Advanta, Dow Chemical, Monsanto, DuPont and Syngenta, all of which have substantially greater resources to dedicate to research and development, production, and marketing than we have.

In English: Big Ag may swoop in and take away all our toys.

In IPOspeak: A significant portion of our revenue to date is generated from government grants and continued availability of government grant funding is uncertain.

In English: Uncle Sam is out of money.

In IPOspeak: Ethical, legal and social concerns about biotechnology products could limit or prevent the use of our products and technologies, which could negatively affect our ability to generate revenue.

In English: Some people say we make frankenplants for frankenfuels.

Winner or Loser: The Digest’s Take.

Winner. If there aren’t dedicated energy crops, the 2010s are going to be a tough decade for bioenergy, with only (largely disaggregated) waste residues, the promise of algae, and already controversial food crops to depend on.

As Richard Hamilton noted at ABLC this spring, “driving yields and growing more biomass per acre increased project size and lowered capital costs per gallon,” and the opportunities lie in low-rent land and off-season planting.”

The Brazilians are serious about sweet sorghum – on our recent inspection trip this past month, we heard repeatedly about the opportunities there. Will Ceres’ Blade sweet sorghum do the trick? That’s a tougher question to answer.

At the end of the day, there’s scaling risk in this space – lots of it. That’s why early-stage investors get into companies like Solazyme at $0.39 per share and the public will be lucky to get in at $20. Ceres is exposed to that risk, let’s be realistic – a bet on this stock is a bet on the space, in so many ways. Understanding the potential value of seeds for dedicated energy crops – against the $11.5 billion for seeds for food crops – and seeing Ceres position and value in that game compared to the IPO ask price – well, that’s the task.

For sure the opportunity is there, and the intrepid investor that correctly identifies Ceres as one of the platform “Intel Inside” companies of bioenergy, will be well on the way to evaluating price versus the risk, in this IPO.