Disagree with your statement that the $1 credit is key for this to succeed. First, nobody in their right mind (including Tyson) would enter into a JV in a new industry that depending on an 'iffy', temporary government tax credit to be viable. Second, I point to the analysis below courtesy of Valdostavetteguy on Yahoo that says this JV will be profitable even without the tax credit (don't get me wrong...it will be nice, but not necessary and the company has said so in their last conference call):
I've updated my business model to include the latest economic factors known. Geismar qualifies for a 1.7 multiplier under RFS2 and the way it comes into play is a game changer if the $1 tax credit is not continued. Remember, the RFS2 is a mandate by the EPA on diesel fuel producers to either buy a percentage of green diesel or buy the equivalent RINs themselves from the biodiesel/renewable diesel producers (like SYNM). Also remember that the RFS1 is why you see the sticker "This pump contains up to 10% ethanol" on your local gas pumps. RFS1 went into effect in 2007 and RFS2 will do for the biodiesel market what RFS1 did for the ethanol market. Each diesel producer's (Shell, Exxon, BP, etc) mandated allotment will be determined by how much fossil diesel fuel they produce or import for sale into the US diesel market.
Management has told us in past conference calls that it takes 7.33 pounds of waste fats and greases to make a pound of renewable diesel fuel. Times that by the going rate of .25 cents per pound for the feedstock (from Friday's article) and add 80 cents for transportation and operating expenses (from the company's Investor Presentation) and you can see it will cost about $2.63 to make each gallon of synthetic diesel fuel at Geismar. That is $1.00 to $1.50 per gallon cheaper than the Biodiesel industry can make soy-based biodiesel for. Biodiesel currently sells for $3.50 per gallon, and WITH the $1 tax credit, the regular biodiesel industry makes around 50 cents per gallon profit. SYNM will clearly have a cost advantage by developing a process so superior it can utilize the lowest (cheapest) forms of feedstock). That's 87 cents per gallon profit for SYNM just in manufacture and delivery of the fuel. But that's in a perfect world and we know we don't live in one so I'm only counting on 25 cents per gallon profit from this stage.
Now add the profit they will get from selling the RINs as mandated by RFS2. Ethanol companies have been getting fat since this was enacted in 2007. In my opinion, this is our chance to join that group (but on the diesel side).
Even at today's price of 50 cents per RIN, times that by the 1.7 multiplier SYNM gets per RIN (because their fuel contains 170% more energy than ethanol) and that's another 85 cents per gallon profit. As they article states, management expect the RIN price to keep climbing if the $1 per gallon tax credit doesn't pass.
But RIN pricing won't stay at 50 cents. It will drop to a forecasted level of around 25 cents per RIN if the $1 tax credit passes or climb to 80-85 cents per RIN if it doesn't pass so I adjusted my SYNM profit model to account for both scenarios:
If the $1 per gallon tax credit passes, SYNM will get the $1 per gallon tax credit plus the lower RIN value of 25 cents times the 1.7 multiplier or 42 cents per gallon. So with me being conservative, that's .25 cents profit from manufacture, plus $1.00 plus .42 or $1.67 per gallon profit.
Now here's where it gets interesting. If the $1 per gallon tax credit it doesn't pass, SYNM's economics will look something like this: 25 cents profit from manufacture plus 80 cents per RIN times the 1.7 multiplier or $1.36 or $1.61 per gallon profit. The difference profit-wise between getting or not getting the $1 tax credit is really only about 6 pennies per gallon.
Arguments could be made that we are better off without the $1 tax credit because we wouldn't be subject to Congress's whims every year and less biodiesel competition. But it seems the market judges us as a regular soy-based biodiesel company for the moment, with our fortunes determined by the fate of the $1 tax credit.
Still, $1.61 per gallon profit for SYNM is huge. Times that by their half of 60 million gallons per year and that's $48.3M profit for SYNM. Add another $3.5 - $4M in profit (again very conservative) from their half of 15 million GPY of synthetic LNG and Naptha, and you have $51.8M in profits. Subtract $2M per year in SYNM overhead not covered by sales of engineering services and another $1M in interest expenses from SYNM's half of the $100M Go-Zone loan currently set at 2.19% per year for 5 years (interest swap) and we're at $48.8M per year in profit. Divide by 80M shares and that's 61 cents per share. Times that by a conservative P/E of 20 and that's a stock price of $12 dollars per share for only ONE plant.
By the way, if the biodiesel tax credit passes, SYNM would gain another $3.25M per year in the 50 cent per gallon tax credit it would receive for its half of 15M gallons of LNG and Naptha.
The two other short-term high value items SYNM has going for it is the $300M in NOLs and the fact that Tyson/SYNM have already said they plan to build 3-4 plants this size as Tyson generates that much waste, fats and greases (billions of pounds per year) to fuel them. As you can see, an argument of $50+ per share in 5 years is certainly viable.
Constructive criticism welcomed.
Disclosure: Unlike others on this board, I don't claim to have a crystal ball. These are my figures and I'm sure they differ from yours. As I've done before, I just threw them out there for info only in hopes it may help others.
Peace.
Vetteguy :)
I find this analysis to be conservative and reasonable. I think this company will be a goldmine for those who invest now and hold-on for 2-3 years. They are the 'Cisco' of the alternate fuels industry IMO. If you get your wish and the stock dips to $1.50, I'd suggest you buy all you can afford.
GLTU,
Murocman
