SERGIO H's Excellent Article (IMO).
A short while ago I found an article in my Inbox about Siluria Technologies and their pioneering work regarding the commercial production of fuels and chemicals made from clean, abundant natural gas. See link below ....
marketwired.com
That article got me thinking about BIOA, the company we discussed on this board a while ago, and one which Sergio H put forward (See posts #3993 to #3998).
I couldn't quite remember the "process or products" that BIOA used to manufacture the same chemical that is created using oil, which in turn is used to manufacture numerous biodegradable products. Apparently BIOA's process is far more economical than using oil. So I did some 'google-ing' to find out more.
During my search I came across, what I thought, was a very enlightening article on the subject. It also dealt with the future investment potential for BIOA ....
seekingalpha.com
When I got to the end of the article I saw that there were two comments, and one of them was from the "contributor" of the article, viz. Sergio Heiber. That name, coupled with the subject of the article, seemed to me to be something of a coincidence. I have since discovered that the author is SI's very own Sergio H !!!
I thought I'd copy the content of that article into this post just in case the Seeking Alpha link should disappear for some reason ---->
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BioAmber Almost Ready To Ramp Up Production
Summary :-
• World demand for succinic acid is expected to grow by almost 50% CAGR by 2020.
• BIOA will begin manufacturing in 2015, in what will be the world's largest bio succinic acid plant.
• 100% of BIOA's manufacturing capacity for its first plant is already under contract.
• Even at today's relative low oil prices, BIOA's production costs are 50% lower than oil-based production.
• 90% of BIOA's capacity for its second plant, expected to be completed in 2017, is already sold.
BioAmber (NYSE:BIOA) produces and sells bio succinic acid and its derivatives. It produces the same exact chemical as is created using oil, but instead utilizes renewable feedstock such as sugar from corn.
Succinic acid and its derivatives are used to manufacture biodegradable plastics, sealants, cosmetics, lubricants, paints, dyes, nylon, spandex, artificial leather and various other products. The manufacturing of bio succinic acid and its derivatives creates no greenhouse gas, and utilizes 60% less energy than oil-based production.
BioAmber began producing succinic acid in 2010 in a facility in France owned by ARD. This was a demonstration effort designed to attract customers, develop product lines and improve the manufacturing process. Demand for succinic acid has been established. Global demand is expected to reach market volume of 593420 tons by 2020, growing by a CAGR of 47%, according to the U.S. Department of Energy. The major drivers are increasing global demand for clean chemicals and the volatility of fossil fuel prices. Even at today's relatively low oil prices, BIOA's production costs are 50% lower than oil-based production. Quoting BioAmber's CEO from the recent earnings call ,"If we were to take the Department of Agriculture's projected ten year average forecast for corn which is $5 per bushel, oil prices would have to drop to below $30 per barrel for us to lose our advantage. With $5 corn and $70 oil, our cash cost remains roughly half of the petrochemical process."
BioAmber has taken steps to capitalize on demand by building the world's largest bio succinic acid plant, to be completed by the first quarter of 2015 and production to begin in the second quarter of 2015. The new facility will have manufacturing capacity of 30,000 tons, and 100% of capacity is already under contract in either take or pay or supply deals. BioAmber plans on having a second plant running by 2017, with a manufacturing capacity of 170,000 tons. 90% of this capacity has already been sold. One additional manufacturing facility is planned for each year afterwards.
Having successfully completed its five-year demonstration project, BIOA is ramping up to meet global demand for clean chemical production. BIOA is offering a cheaper product, and one that is environment-friendly. It's a win, win for all. Manufacturing capacity for the next 15 years is practically all sold for the next two manufacturing facilities, with more production planned from future plants.
I am impressed by how well-managed this company is. For the five-year demonstration period and the factory construction, it has been 100% on-target on costs, it has obtained low-cost financing from government programs to fund construction and it has attracted sixteen new customers. I am not factoring in other directions BIOA could take in replacing manufacturing of other chemicals, although it has already proven this ability.
The cash position was recently increased by $36 million from an equity offering. It is expected that the proceeds will be used to pay a $25 million high interest loan from Hercules, and that BIOA will have about $32 million in cash after the completion of its first factory. The reduced debt will result in positive cash flow, excluding any further financing for additional plants. The EBITDA estimate through 2017 is $457 million. Adjusting for cash burn and excess cash estimates, and applying a modest multiple of 9 results in a DCF price target of $20/share. There is, of course, the possibility that BIOA will obtain additional income from third-party licensing deals.
BIOA offers clean chemical production at a lower cost than existing production methods, with a green benefit. The company has established that it will be able to finance growth without dilution, that there is demand for its product, that it is able to obtain low-cost financing to fuel its growth, that there is a wide amount of applications for its products and that it is allied with the major players in its field.
BioAmber, Succinity and Reverdia are the major manufacturers of succinic acid, supplying over 60% of demand in a developing market. Competition is likely to increase as more companies enter into the picture, presenting some downside risk. It is also conceivable that a competitor will develop a better or less costly manufacturing process or that BioAmber will encounter problems in construction of its new plants.
This is a long-term play with major catalysts expected as the company executes its strategy of increasing production, adding new customers with different applications for its products and potentially developing other chemicals produced without fossil fuels. Taking everything into consideration, I would expect this stock to provide solid returns for the next few years as the company's plan unfolds.
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