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Solazyme -- >>> Solazyme's Hidden Value For A World Made Blind By Associations



June 25, 2012
by: Kevin Quon


about: SZYM, includes: AMRS, DOW, GEVO, MON, SYT, UL



http://seekingalpha.com/article/682761-solazyme-s-hidden-value-for-a-world-made-blind-by-associations?source=yahoo



As a company that has almost errantly been associated as a commodity biofuel producer, renewable tailored oil innovator and manufacturer Solazyme (SZYM) is likely to endure increasing criticism in the coming weeks. The U.S. Navy is about to demonstrate the "Green Fleet," an armada of ships running on biofuel and nuclear energy conducting joint exercises in the Pacific starting on June 29. For a company that has yet to turn positive earnings due to ongoing construction of its manufacturing capacity, increased scrutiny is more than welcome but less likely to be given by those who would just as easily use the company's name in the media. Undoubtedly, much negative attention will be aimed at politically charged issues such as the contract prices paid for Solazyme's contribution of oils to the Green Fleet, which were used for biofuel purposes.


Yet however laser-focused the critics, politicians, and media might be in pointing out these spin-laden concepts, the truth remains that such misplaced priorities neglect to understand a larger process that is unfolding before their very eyes. While admittedly the biofuel sector itself has many years to go before effectively making a meaningful impact in society, what is being widely misunderstood is the fundamental disruptive changes to industry that conversion technology is bringing to the table.

Companies like Amyris (AMRS), Gevo (GEVO), and Solazyme, for instance, are all at some level able to provide meaningful solutions to high-margin businesses and multiple industries apart from mere commodity biofuels. To give an example, Gevo is working with Coca-Cola (KO) to develop a 100% plant-based polyethylene terephthalate resin, which will ultimately be used to create plastic bottles entirely from green sources apart from petroleum. As for Amyris, the company is able to create existing hydrocarbon molecules and chemicals used to create lubricants, cosmetics, fragrances, and polymers.

Yet Solazyme takes this concept one step further with its heterotrophic algae and sugar inputs. The company is able to replicate whole triglyceride oils as compared to mere hydrocarbon molecules. Additionally, the company's technology permits innovative customization that allows for the creation of never-before-seen oil profiles that are superior to the products they're replacing. This is why Unilever (UL) and Dow (DOW) have deepened their relationship with Solazyme in order to cooperatively research the possibilities. However, even these concepts only begin to scratch the surface of the changes to industry that are now under way.

But every dynamic shift takes time, and for now the financials point to a seemingly gloomy picture from a cursory glance. Potentially new shareholders see losses jumped from $16.42 million in 2010 to a $53.96 million loss in 2011. Just the mere thought of these numbers can be enough to seal the coffin shut in the minds of some investors. But investors who dig deeper have a greater sense of just how fast things are about to turn around. By 2015 the company expects to bring online nearly 500,000 metric tons of capacity and over $1 billion in revenues, a more than a hundredfold increase in revenue-generating capability to the present. This increase multiple even grows exponentially when one considers that the actual production recorded to date hasn't even technically incorporated the newly established Preoria facility running at its full operations. Indeed, the interesting thing is that the company has been generating 70% gross profit margins on revenues that have almost entirely been derived from contract manufacturers.

In short, the company hasn't even begun to show what its capable of doing on the financials yet with its own facilities. And with gross margins on the lower end of their capability ranging between 30% and 60% for their fuels and chemical sectors, only investors who are able to read between the lines past commonly used metrics like earnings ratios and book values will have the slightest chance of understanding the opportunity that lays before them.

For its own part, Solazyme has seemingly stumbled on a unique set of value-added benefits that extend beyond mere product capabilities. It's these unquantifiable advantages that help illustrate the invisible assets that remain unaccounted by the market or the critics. The company's hidden benefits begins to express the immeasurable amount of value being played out in the world of industrial biotechnology:

Flexible Outputs. Solazyme's process allows for the ability to redirect production using a single piece of standardized fermentation equipment in order to address a very wide range of market needs. Armed with the capability to address all markets currently being supplied by oils derived from petroleum, plants, and animal fats, Solazyme's technology allows a single sugar supplier to smooth out demand fluctuations between these markets on the basis of price. Has soy dropped in price, but crude oil spiked? The ability to switch from plant oil production to petroleum oil production is as simple as replacing a parent vial of manufactured algae.

Output Consistency. Whereas in the world of plants, weather plays a large part in the yield output, Solazyme's oils remains consistent in terms of yield and in terms of quality. The same could be said about the type of oil profiles. Too much rain here or too much sun there can affect the oil quality of a given crop for plants. But with Solazyme's controlled environment, its algae have been proven to provide more product consistency -- a valuable trait from a supply perspective.

Research Acceleration. When it comes to innovation, Solazyme's turnaround time and costs are several times faster and cheaper than its competition found in large companies such as Monsanto (MON) and Syngenta (SYT). Whereas such agricultural seed companies must await the growth of plants in order to test results, Solazyme's technological platform and molecular tool kit revolve around very fast-growing algae. The company estimates it can bring to market new oils at least five times faster than large seed giants like Monsanto and Syngenta.

Product Optimization. Solazyme's key advantage lies in its ability to enhance a specific oil for industry use. A look at this article shows just how this is occurring in the development of dielectric fluids for example. By introducing ideal characteristics into its oil profiles, Solazyme's technology allows for further downstream innovation that opens markets and spurs economic growth.

When we look at just a few of these vast hidden improvements Solazyme's technology offers to industry, it becomes clearer to see that an evolution of industrial processes is at hand. Seemingly only constrained thus far by the development time of production capacity, one must maintain a healthy skepticism to the ill-conceived notions of critics who focus on the company's biofuel association. Surprisingly, despite the fact that biofuel itself will be taking the backseat to higher margin focuses on cosmetics, chemicals, and food, critics seem to mindlessly gloss over this mere technicality. They continue to believe in negative associations to first-generation ethanol and government-subsidized failures. In doing so, they continue to voice their own lack of understanding of a bigger picture at hand.

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