Tag Archives: brazilian
Brazil: Just Not That Into Second-Generation Biofuels
Posted September 30, 2013 While the US and the EU — two of the world’s largest biofuel-consuming-and-producing markets in the world — are moving towards the introduction of second-generation or advanced biofuels , Brazil, the second-largest producer, does not foresee production or legislation to promote cellulosic or advanced biofuels in the next ten years. Global biofuel production has grown sevenfold since 2000, and today biofuels provide 3% of road fuel transport by energy basis. According to the International Energy Agency (IEA), in 2010 the biofuel contributing percentage was particularly higher in Brazil, US and the EU, with 20.1%, 4.4% and 4.2% respectively. The IEA, the Energy Information Administration, and even the major oil companies like Exxon and BP predict a higher biofuel share in the future. BP expects biofuel consumption in Brazil to be around 38% by volume, and in the US, 24% of road transport by volume in 2030. Following US and EU biofuel legislation, cellulosic ethanol and other advanced biofuels are expected to play an increasingly large role in global biofuel production and consumption. However, Brazil is not as eager to join the race for the development and commercialization of second-generation and advanced biofuels as the other main producing countries/regions, despite having the largest share of flex-fuel cars in the world, the highest ethanol blend percentage mandate, and consumer awareness of ethanol’s positive impacts. The long history of ethanol use and the two ‘revolutions ’ Brazil has a long history of ethanol implementation that started since the first blending mandate in 1931. In the South American country, ethanol is derived from sugarcane in two ways: as hydrous ethanol, used as a complete fuel substitute (E100) and anhydrous ethanol (in proportions up to 25% mixed with gasoline E25). In Brazil there have been two major revolutions that have substantially increased the use of sugarcane ethanol in the country, which created a large first-generation ethanol market. The first revolution was the government Proalcool program in the 1970´s. During this program, ethanol as a fuel substitute was first introduced alongside ethanol-run cars (made only in Brazil). This program increased the ethanol blending mandate from 4.5% in 1977 to 15% in 1979. It also pushed ethanol-powered cars to 90% of total cars sold in Brazil in 1983. Although the program was abandoned due to ethanol shortage and lower oil prices, it provided the country with wide ethanol infrastructure adaptations for distributing, transporting and selling this type of biofuel at pump stations. The other great change in the Brazilian ethanol market took place when the flex-fuel cars became available in 2003. This type of vehicle has a new engine that can take any combination between hydrated alcohol and gasoline. In 2003, only 2.6% of new manufactured cars were flex fuel type, but by 2010, nearly 80% of all cars produced in Brazil were flex fuel-compatible. In contrast to the US market, where not more than 5% of cars can use flex fuel, Brazil has the largest market flex-fuel fleet (over 11 million) representing nearly 50% of all cars in use in Brazil, a trend that is expected to increase to 83% by 2021. The large share of flex-fuel cars prompted a substantial increase in both anhydrous (blending component) and hydrous (substitute fuel) ethanol demand. The ethanol market share within the light vehicle fleet fuel market has also reached a large proportion, attaining more than 50% in 2009 (a historic record for an alternative fuel). However, the aftermath of the 2008 crisis generated a downturn in the production and consumption of both type of ethanol fuels. The mismatch between the country’s domestic supply and demand resulted in ethanol imports from the US in 2011. Since 2012, domestic production has recovered, but the government does not expect a swift recovery to levels before the crisis. Brazil had in 2012 an ethanol market of 23.5 billion litres, down from 28 billion litres in 2010. The sugarcane feedstock advantage Brazil´s sugarcane ethanol has been characterized as the most efficient source of first-generation biofuel available, providing more than 60% reduction of greenhouse gas (GHG) emissions compared with gasoline. Current US biofuel legislation FS(2) consider sugarcane ethanol as an “advanced fuel” due to the fact that it reduces more than 50% of GHG emissions and therefore provides an opportunity to export to the US market. Moreover, the removal of the US ethanol import brought an extra incentive to spur ethanol production in the South American country. Stuck on first-generation, missing drivers and lacking second-generation policy Despite the recent US market incentives, the largest flex-fuel share in the world, and the highest anhydrous blend, Brazil has not generated stimulus to follow the US and EU’s examples for advancing legislation for the development of cellulosic ethanol and other advanced fuels. The missing drivers for such endeavor are related to characteristics of the Brazilian sugarcane ethanol, which already provide high reduction of GHG emissions, and to the lack of interest of pursuing the biotechnological route by the Brazilian government. Brazil, which has had difficulties supplying their local market since 2011, has done very little to promote the development of cellulosic or other advanced biofuels. There is currently a lack of legislation in place that sets targets for the production and incorporation of the cellulosic or advanced biofuels in the Brazilian transport mix for the next decade. Brazil/s Ministry of Energy, in its ten year plan for 2012-2021, does not foresee second-generation production in Brazil in 2021. It expects all 61 billion litres of ethanol production in 2021 to come from conventional sources. There have been few projects seeking to develop new advanced technologies using sugarcane feedstock both from government funded institutions and other private companies. However, not surprisingly, numerous projects are being developed by international companies such as Novozymes, Butamax, Dupont, Petrobras, Abengoa which are among a selected group that are in the process of receiving up to 70% of credit of their total costs from the 880 million USD PAISS program , a program financed by the National Brazilian Development Bank (BNDES) and FINEP (National Innovation Funding Agency) for developing sugarcane-based advanced biofuels. Graal Bio, in partnership with the Italian firm Beta Renewables, claims to have the first cellulosic plant of its type in South America; they are expected to be fully operational in 2014 and produce 82 million litres of ethanol per year. They plan to export their production to the United States. The development of first-generation ethanol implementation has not provided stimulus to spur cellulosic or advanced biofuel legislation and development. If cellulosic or other advanced biofuels are to be developed to large scale and play an important role in the future fuel transport mix, Brazil should be taking more steps into the promotion of such fuels, helping to diversify the feedstock sources as it currently does with sugarcane in first generation. Continue reading
Adecoagro: An Excellent Long-Term Farmland Play
Oct 2 2013 Stock And CMP – Adecoagro S.A. (AGRO) currently trades at $7.61 Investment Summary Adecoagro is an excellent farmland play with a meaningful country risk related to Argentina. Current valuations are however compelling enough to consider the stock with a long-term investment horizon. Company Overview Adecoagro is a South American agricultural company and owns over 275 thousand hectares of farmland and several industrial facilities spread across the regions of Argentina, Brazil and Uruguay. The company produces over 1.2 million tons of agricultural products including corn, wheat, soybeans, rice, dairy products, sugar, ethanol and electricity, among others. For 1H13, Adecoagro generated $291 million in sales and $70 million in EBITDA with a robust operating cash flow of $38.2 million. The Bullish Case The Cushman & Wakefield appraisal and valuation of the farmland property underscores the case of undervaluation and stock upside potential. As of September 2012, the market value of the farmland in Argentina and Uruguay was estimated at $800 million. The same appraisal, values the Brazilian farmland at $137 million. Three recent farmland sale transactions prove that the farmland valuation given above is relatively conservative. On September 2013, Adecoagro entered into a sale agreement to sell the San Martin farm for a total price of $8 million. This represents a 15% premium over the Cushman & Wakefield land appraisal value. In December 2012, Adecoagro completed the stake sale of Santa Regina at an 11% premium over the Cushman & Wakefield land appraisal value. Also, Lagoa do Oeste and Mimoso farms in Brazil were sold at a 7% premium over the Cushman & Wakefield appraised value with the transaction generating $20.8 million of cash proceeds. (Source: Slide 5 of 2Q13 presentation). One can therefore safely assume that the current land valuation would be at a 15-20% premium over the appraised value considering the fact that the appraisal was done in September 2012. A comparison of the land valuation with the current market capitalization is presented below. (click to enlarge) A premium of just 20-40% over the land valuation for a going concern is attractive. For the first six months of 2013, the business has generated a positive operating cash flow of $38.2 million. Also, investments of $126 million for the same period indicate an aggressive growth strategy, which should translate into higher income growth and cash flow growth in the foreseeable future. Therefore, just from the current farmland holding perspective and its capability to generate robust cash flows, the valuations look attractive. The transactions, which have been at a premium over the indicative valuation by Cushman & Wakefield, also point to the fact that Adecoagro has the financial flexibility through farmland sale besides the regular fund raising activities. From a valuation perspective and especially from a cash flow perspective, it is encouraging to witness a steady improvement in the company’s earnings quality. As the chart below shows, the company’s EBITDA cash conversion has increased from 38% in FY11 to 54% in the first half of 2013. This is positive for a high growth company, which needs significant funds for expansion. (click to enlarge) Coming to the factors that will keep the revenue, EBITDA and cash flow growth robust, the company’s sugarcane and ethanol business have witnessed robust growth backed by significant investments in the segments. For the first half of 2013, the company net sales from the sugar, ethanol and energy segment increased by 24% to $117.7 million and the EBITDA increased by 364% to $40.7 million. Growth in the segment will continue and the segment will be one of the key stock price drivers for Adecoagro besides the rich farmland valuation. In particular, the company’s third sugar and ethanol mill in Brazil, named Ivinhema, will drive growth as this will enable Adecoagro position itself as one of the lowest cost producers of sugar, ethanol and energy from sugarcane in Brazil. Adecoagro has completed phase one of the Ivinhema mill with a crushing capacity of 2 million tons. Phase two will add another 2 million tons by 2015 and phase three will increase the total crushing capacity to 6.3 million tons by 2017. To put things into perspective, 2 million tons of annual crushing capacity at full capacity utilization would potentially imply revenue of $120 million and an EBITDA of $40 million considering the 1H2013 EBITDA margin of 30% for the sugar, ethanol and energy business. Therefore, the upside potential is significant in terms of revenue considering higher utilization of the current capacity. From a valuation perspective, Adecoagro currently trades at 7.4 times trailing twelve month EV to EBITDA multiple. It is however more important to consider the forward valuation and the current stock price with respect to forward valuations. If Adecoagro maintains the EBITDA growth rate clocked in the first half of 2013 (highly likely on seasonal factors and increased crushing capacity), the EBITDA for FY13 would be nearly $200. Further, if we consider the EBITDA growth to be somewhere close to the earnings growth estimates for 2014, the expected EBITDA for 2014 would be $280 million considering a 40% EBITDA growth. This would translate into an EV to EBITDA multiple of 4.8 for 2014. Even on the PE valuation front, the expected earnings growth suggests a FY14 PE of 10.4, which is attractive for an agriculture sector company. The primary reason for relatively depressed valuation is the company’s exposure to Argentina, which is subject to significant country risk. However, I believe that valuations will start adjusting on the upside going forward as the company generates a significant chunk of its revenue from Brazil. The constant sale of land at premium valuations also provides the necessary cash flow for investment in the Brazilian business. In order to boost investor confidence and underscore the management’s faith in the business, Adecoagro announced (September 23, 2013) a share repurchase program amounting to 5% of the company’s outstanding shares. The broad timeline for the repurchase is from September 24, 2013, with an initial horizon of 12-months. The repurchase serves two purposes – It positively impacts the stock price and it shows the confidence of the management in the company and the management’s focus on creating shareholder value. According to Mariano Bosch, the CEO of Adecoagro – We are focused on generating attractive returns in each of our businesses. Our consistent ability to sell developed farmland at premiums over the Cushman & Wakefield independent appraisal has enhanced our financial position and reconfirmed the value of our assets. The approval of the repurchase program reflects the Board of Directors’ and Management’s commitment to continue delivering increased value to our shareholders. The Risk Factors The country risk related to Argentina still exists. However, as mentioned above, the risk is diminishing with growing revenue share from Brazil. However, the company’s farmland value in Argentina and Uruguay was at $800 million as of December 2012. Therefore, the asset risk can’t be ignored completely. Another risk factor is the current valuation of farmland. While this is more of the concern in the United States, farmland prices have increased globally. If prices do enter in a bubble territory and decline, the company’s valuation would adjust to the downside. In my opinion, this scenario is unlikely in the foreseeable future as global food demand keeps farmland prices steady. An erratic weather condition is another risk factor in the farmland industry. This factor needs to be discounted in current times when global warming and its impact on the weather is a big concern. Conclusion Despite the risk factors, there are enough positive triggers for Adecoagro and the next few years can be fruitful for the company and investors as the sugarcane and ethanol business drives the company’s EBITDA higher. Investors can consider exposure to the stock with a long-term time horizon. However, there could be enough positive action in the stock over the next 1-2 years and the prices could surprise on the upside. Continue reading
KiOR Illustrates The Futility Of Cellulosic Biofuels
Sep 5 2013, 15:13 | about: KIOR Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) KiOR is the latest object lesson in how energy investors ignore science at their own peril. As of 30 June 2013 this start-up was down to $11.5M in cash and $20M in untapped credit, with long-term debt of $150M and a quarterly burn rate well over $30M. Since commissioning its 10 MGY commercial-scale facility last October, it has produced no more than 73,000 actual gallons of RIN-eligible cellulosic blendstock with total revenues of $310,000 (~$4/gal). Cost of product revenue totals $20.5M (~$280/gal) and shows how far it is from break-even, let alone profitability. With about 60 days of liquidity left, bankruptcy looms before the end of September without an infusion of new investor cash. Recently a class action shareholder lawsuit was announced claiming that CEO Fred Cannon’s forecasts of production and revenues were unreasonably optimistic. The Company’s widely-circulated expectations to produce 3 million to 5 million gallons in 2013 contrasts with a production rate less than 1/10th the necessary annual pace. It is not just shareholders, but Wall Street analysts and government agencies that seem to have been caught by surprise. The EPA’s original 2013 renewable volume obligation counted on KiOR for over 5 million of the 14 million gallons of cellulosic gasoline and diesel required. Cannon’s most recent prediction for 2013 has been revised downward to 1 million to 2 million gallons . Why is producing competitively priced liquid fuel from cellulosic feedstock such a challenge? The answer is in fundamental chemistry and biology and physics that stubbornly limit what even the cleverest geneticist and richest venture capitalist can do. A comprehensive and mutli-disciplinary look at the full spectrum of biofuels is available via the Waterloo University Institute for Complexity and Innovation . Hopefully a brief discussion below can outline the basic case and help more investors from being separated from their money chasing this white rabbit. To illustrate the ultimate futility of cellulosic ethanol, it is instructive to compare it with corn ethanol. US corn farmers, benefiting from generations of technical and genetic improvements, have increased yields six-fold since 1940 and today can produce from a single acre as much as 500 gallons of ethanol from 5 tons of corn kernels. However, growing and processing the corn at such scale consumes huge amounts of energy. Rigorous lifecycle analyses have revealed that the energy return on investment (EROI) of corn ethanol is only 1.25:1; only 1.25 units of energy are output for every unit of energy input into farming and processing. And the energy portion delivered as ethanol is just equal to the energy input from natural gas and petroleum fossil fuel. Only the creative bookkeeping practice of counting the distillers dry grains and solubles byproduct (DDGS) as energy instead of animal feed gives the overall process that tenuous 25% energy profit. The massive US corn ethanol program than consumes more than 40% of the corn crop is essentially a way to convert non-renewable fossil fuel into non-renewable ethanol with a bit of renewable animal feed protein supplement as a kicker. When compared to the EROIs of gasoline and diesel fuel and coal electricity, which range from 10:1 to 30:1, it is clear that corn ethanol represents a huge opportunity cost in terms of using that same fossil fuel energy more directly to serve society. The facts are even less kind to cellulosic ethanol. The input energy required to make alcohol or other fuel blendstocks from cellulosic biomass is about three times higher than from corn kernels, which means cellulosic biorefineries at scales similar to today’s corn ethanol refineries deliver a product that has a negative energy balance and EROI far less than 1:1. Scaling up the operation just digs a bigger hole faster. The reasons for this disparity in EROI are basic chemistry and basic farming. The basic chemistry of crop-based biofuels is growing plants to harvest their sugar and convert it into fuel. The snowflake-shaped sugar molecule is the building block of all green plants and can be assembled into many forms, all of which are collectively known as “carbohydrates.” But not all carbs are created equal, as any dietician knows. Some sugar molecules remain loners or bound in pairs and comprise the simple sugars and starches found in the easily digestible, high-calorie, food portion of crops such as fruits and sugarcane sap and corn kernels. These are also the portions most easily converted into alcohol. But carbohydrates also come in the form of million-molecule polymers of sugar molecules that are chained together to form cellulose fibers. These massive molecules are incredibly tough and resistant to being broken down. Compounding the problem is that cellulose fibers are trapped in a matrix of lignin, another massive polymer molecule even tougher to break down, and the two must first be separated at the cost of huge additional amounts of energy. Even after separation, cellulose is indigestible to humans and can only be broken down in nature by specialized ruminant animals like cattle that spend their entire waking hours grazing and chewing and fermenting it in their four stomachs because it is a low-density, low-power, low-EROI energy source. A field of grass can provide energy at a pace to sustain walking cows, but not speeding cars, so we must multiply the energy by harvesting more acreage. However, both corn ethanol and cellulosic ethanol fail to benefit much from scaling up. This is because farming is an industry that is more responsive to economies of density than economies of scale . The major costs of farming (fertilizer and chemicals and farm equipment fuel) are proportional to the acreage of land that must be sown and harvested. When yield per acre is low, the cost of harvesting and collection and transportation rival the per-acre value of the crop. All the revolutions in agriculture over the past century have been targeted to squeeze more yield out of fewer acres. To illustrate how scaling up actually hurts, consider that a biorefinery surrounded by crop fields must send its trucks further outward from the plant with longer round trips to collect each additional increment of biomass – feedstock unit costs go up rather than down with increased plant demand and production. The tyranny of geography is one of the reasons why start-ups moving from pilot to commercial-scale biorefineries have not seen their feedstock prices coming down as they anticipated. Sustainably growing enough cellulosic biomass to replace US petroleum fuels without boosting crop density with fertilizers and other EROI-decreasing practices of modern intensive farming would require multiple billions of acres of crop land. Even intensive farming of cellulosic biomass crops with the same energy-intensity as corn will only reduce the farm land necessary to about half a billion acres — more than twice the nation’s currently harvested crop land — and the energy return would be hugely negative. The sobering truth of all the above is reflected in the price of bioethanol. US corn ethanol continues to be more expensive than gasoline when compared on an equal-energy, equal-octane basis, which is much more meaningful than the volumetric basis (gallon-to-gallon) favored by the EPA and refineries because it hides the wholesale cheating of consumers that is being done via the Renewable Fuel Standard (RFS). Energy in the gas tank, not gallons, is directly proportional to the distance a vehicle will travel. As of January 2013, the US Department of Energy reported that, on an equivalent energy content basis, E85 ethanol was $1.19 more a gallon than gasoline . American Automobile Association surveys of pump prices also reflect that E85 is consistently more expensive on an MPG-corrected basis than premium octane gasoline. If the price of bioethanol is plotted out against gasoline over the past 8 years, it is not only consistently much higher, but shows the same degree of volatility. The higher price per joule or BTU of ethanol translates into an additional $8.1 billion that Americans paid in 2012 at the gas station for miles not put into their gas tanks because they got ethanol instead of gasoline. When added to the $6.1 billion in federal expenditures for corn crop program subsidies and ethanol blending tax credits, the total cost was $14.2 billion to displace 9.5% of US motor gasoline volume (6.4% of its energy content) with corn ethanol — and the cheaper petroleum gasoline being displaced was ironically being exported to Venezuela and Europe and other countries while we increasingly import Brazilian sugarcane ethanol . Such is the perverse effect on our national energy security of ill-conceived policies uninformed by science. If generations of hybrid breeding and decades of direct genetic engineering performed on corn and the enzymes and bacteria and yeasts that process it cannot deliver ethanol with competitive EROI and price from the inherently more favorable chemistry of starch feedstock, then what scientific basis is there to expect inferior cellulosic feedstock to deliver more? Cello , Range Fuels , KL Energy ( KLEG.PK ), Iogen, ZeaChem, Virdia, Virent, Gevo ( GEVO ), Coskata, Primus Green Energy , Chevron , Shell, and Codexis have all beat their heads and fistfuls of cash against this wall and failed to make a breakthrough in commercially viable bulk fuel from cellulosic feedstock. Geneticists and venture capital cannot bypass the laws of physics and chemistry. BP ( BP ) apparently saw the writing on the wall last October when it suspended plans to build a commercial-scale cellulosic biofuel plant in Florida . KiOR and INEOS Bio are having their turn at figuring it out the hard way right now. Next up with planned commercial-scale plants are Abengoa ( ABGOY.PK ) and DuPont ( DD ). A recent trend in cellulosic ethanol plants, as evidenced by INEOS and Abengoa, is to build natural gas co-generation facilities instead of pure cellulosic biorefineries. This author suspects the plants are being built this way because these companies are coming to grips with the truth of cellulosic ethanol above and are positioning themselves to convert to compete in the natural-gas-to-liquid (NGTL) fuel race as Coskata and Primus have already done. NGTL is another topic for another article, but suffice it to say that it is a far more viable pathway to commercially competitive liquid fuel than cellulosic ethanol. Investors would do well to make their plays anticipating that no company relying exclusively on bulk liquid fuel sales from cellulosic biomass feedstock will ever see profitability. KiOR, like Cello and Range Fuels, has nothing to fall back on and is irretrievable. INEOS Bio may find a way to eke out a living as a landfill methane-powered electricity and heat plant, but not as a bulk liquid biofuel vendor. Abengoa and DuPont’s biorefinery efforts are ill-advised and will never make any honest profit for their parent companies. The only scheme for survival of such plants is with taxpayer help in the form of direct federal subsidies for their product in combination with selective additional taxes on their competitors. So far EPA RINs and blending mandates have proven inadequate to compensate for the inherent energy deficit of cellulosic ethanol. Even a steep carbon tax is unlikely to shift the scales enough to make cellulosic ethanol competitive, and it will certainly never be able to compete with corn ethanol or sugarcane ethanol if all are getting the same federal financial and regulatory assistance. In Europe, the standards for claiming “renewability” for liquid fuels are getting tighter . If that trend crosses the Atlantic, it will further hinder liquid biofuels by exposing their true lifecycle GHG emissions and large fossil fuel energy content. The liquid biofuels sector is living on taxpayer-funded life support and cannot survive without it. KiOR is proving once again that cellulosic ethanol cannot survive, even with it.[/color][/color] Continue reading
