I cannot possibly come up with a way to defend the current market cap for advanced fuel manufacturer KiOR (NASDAQ: KIOR). The company recorded its first trickle of revenue (ever) in 4Q12. The company has one commercial scale facility with an annual capacity of just 11 million gallons per year (mmgy). The company's platform combines pyrolysis -- high pressure and temperature -- with a catalyst to create cellulosic gasoline and diesel from wood chips. The company's cost to do so will be around $6 per gallon in 2013.
However, the company should not be compared to the Solyndra of advanced biofuels, Range Fuels. They have similarities, but I think there are major differences in platforms and results that investors should know about.
Range Fuels
The intentions of now defunct Range Fuels were novel: use wood chips and waste residue from the pulp and paper industry as a feedstock for cellulosic ethanol. The company's ambitions were largely responsible for the unrealistic government targets for cellulosic fuels that remain in place today. Unfortunately, the company was a little ahead of its time – and itself. Despite being granted access to over $160 million from investors, and $162.5 million from Uncle Sam, the thermocatalytic processing platform never amounted to much of anything.
Range Fuels spent frivolously, failed to heed early warning signs about the scalability of its process, and jumped into a business plan that could not be supported by the market. As a result, the company collapsed at the end of 2011. One of the most promising companies in the space, LanzaTech, has scooped up old assets at bargain prices with hopes to revitalize the vast infrastructure. Since LanzaTech is privately owned, investors looking to buy into similar wood-chip-fed platforms must turn to KiOR.
Revenue = goose egg
Why hasn't the company recorded any revenue? Well, I'm sure you would agree that it is mighty difficult to sell a product that hasn't been created. Over the last several years KiOR has favored small, dedicated teams over a massive expansion plan taken up by other start-ups. The strategy succeeded in scaling the company's platform; although $196.6 million in losses were amassed from early 2008 to September of last year.
Compared to the debts accumulated by other companies that actually quite impressive. Perhaps the largest black eye of the industry is Amyris (AMRS +0.00%), which has coughed up losses of $221 million over the last 12 months. That eyesore is what's left after $109 million in revenue and a reduction in headcount.
I was originally mesmerized by Amyris' potential, but as bad news began to trickle out on all fronts – management shakeups, partnership worries, falling revenue – I quickly jumped ship. Hindsight is 20/20. Nonetheless, the experience, which occurred in the first few months of my brief writing career, has shaped my research routine for the industry. I still believe the company has awesome potential; it just has a bigger hole to climb out of.
Friend request
As for KiOR the lack of inventory will change shortly. In 4Q12 the company began operations at its first commercial-scale facility in Mississippi, which means the clock is ticking for the announcement of its first shipment of renewable gasoline and diesel. One destination for fuel created from the facility will be Catchlight Energy, the wood-waste-to-fuel joint venture between Chevron (CVX +0.05%) and Weyerhaeuser (WY 0.53%). Catchlight is a small venture, but it operates in the almost non-existent industry of next-generation woody biomass-derived fuels. That's why befriending KiOR is such a big deal.
The three well-managed companies are looking to corner the cellulosic fuel market, which is "supposed to" (government target) reach 16 billion gallons per year in 2022. By comparison, corn ethanol production will max out at 15 billion gallons this year. Oh, and according to the current Renewable Fuel Standard (RFS), Chevron will need to purchase an estimated $5.7 billion of renewable fuels by 2022.
Source: KiOR, EPA 2012
Best of both worlds
So how much fuel will the first revolutionary facility produce? The company is targeting an initial capacity of 11 mmgy on a daily feed of 500 dry tons of wood chips. Hurdles remain, but KiOR is better able to predict a development timeline because it utilizes well-understood technology. The wealth of knowledge on thermocatalytic platforms makes them much easier to scale than their hopeful biocatalytic counterparts employed by the likes of Amyris, Solazyme, and Sapphire Energy.
The ability to scale predictably is also aided by its modular nature. Similar to petrochemical processes, KiOR can add cracker trains to increase the capacity of its facilities. More specifically, the platform will use fluid catalytic cracking technology, which has been used in chemical engineering since 1942, to turn pyrolysis oil into fuels.
You can think of the company as a next-generation oil refiner with a process that currently yields about 72 gallons of fuel per ton of wood residue. As time goes on catalyst upgrades will see yield increases on two fronts. More efficient catalysts produce less coke byproduct, which in turn allows more feedstock to be processed with minimal infrastructure improvements.
Should KiOR increase yield to its final target of 90 gallons and reduce coke production by 25% the facility could produce up to 18 mmgy. A gradual increase in efficiency will be necessary to lower production costs from $6 per gallon in 2013 to a more feasible $3 per gallon (or less) in 2015. With a second 35 mmgy facility on its way in 2014 achieving greater economies of scale will be integral to the company's long-term future.
Foolish bottom line
Challenges lie ahead, but it is light years ahead of lifeless Range Fuels. KiOR has major partners lined up, a more predictable process, and plenty of incentives to improve its platform. Market prices (up to $2.88 per gallon) and RFS renewable identification numbers, or RINs, (up to $2.36 per gallon) will allow the company to pocket $5.24 per gallon of fuel. That represents a loss at the moment, but with little competition for cellulosic fuels, RIN values will remain high for the foreseeable future. It is scary to think, but KiOR could soon realize a profit of over $2 per gallon on nearly 70 mmgy if it can get reach efficiency targets.
I am certainly keeping an eye on process developments at KiOR, but there is too much to prove for me to support its current market cap -- or an investment -- anytime soon.
