Best stock to invest in – Amber Means Caution But BioAmber Means Go



Best stock to invest in

Jim Lane

In Canada, BioAmber (BIOA)
recorded net income of $4.8M for Q2 2016 and an operating loss of
$1.0M on revenues of $2.5M. Revenues were up 73 percent over Q1 and
637 percent compared to Q2 2015.

For those less familiar with the company, it produces succinic
acid from sugar at a first commercial-scale plant which opened
recently in Sarnia, Ontario. Succinic acid has a small existing
global market but can be converted into a variety of chemical
building blocks used to produce a range of plastics, paints,
textiles, food additives and personal care products.

If for some this relatively small venture is “the hope for the
renewable chemicals movement”, the reason lies in oxygen. Which is
to say, sugar has it, succinic acid has it, but petroleum doesn’t.
That means that any effort to make succinic acid from petroleum
involves at least one extra process step — the add-back of oxygen.
It also means that the yield of succinic acid from sugar is
inherently higher, on a percentage basis than, say, the production
of hydrocarbons used as diesel or jet fuel, or chemicals such as
ethylene.

That lowers the threshold at which renewables can compete on cost
with petroleum-based molecules — and that’s no small matter when
fossil fuel prices have tumbled to 10-year lows. Combine that with
the usefulness of succinic acid as a building block, and you have
a powerful combination.

So, many eyes — beyond the usual collection of employees,
investors, and supply chain partners — have been on the Succinic
Sultans of Sarnia.


The 5 Key Trends

Let’s look at five key BioAmber trends, and measure’s the
venture’s progress.

1. Product cost.

Aside from product acceptance — already assured via a
transformative offtake deal with Vinmar that we covered here,
there’s nothing more important than product cost. It’s the fatal
problem for most early stage advanced bioeconomy ventures. It’s
the difference between being stuck in small, high-margin niche
markets, possibly forever and certainly while the cash runs out —
and a breakout into larger volume markets where the growth lies.

There’s good news here. “The cost per ton of bio-succinic acid
sold continued to decrease, with a 30% reduction relative to the
previous quarter,” said the Company in its earnings report. In the
context of overall goals? “Sarnia variable costs were lowered to
the Company’s 2016 target.”

2. Up-time.

If you’ve been following the travails of various cellulosic
ethanol ventures, you know that they have excellent product prices
at the moment and mandated markets. Production plant up-time has
been a huge headache.

On that note, it’s excellent news to read that “Sarnia achieved
an uptime rate of over 80% in the month of June 2016, having
increased steadily during the second quarter.” The Q3 uptime rates
will be critical to understanding if BioAmber has cracked the
operational puzzle, but the progress if highly encouraging.

3. In-spec production.

One of the ventures key performance indicators has been the
production of in-spec chemicals. It’s fermentation regime has
shown a tendency to wobble off course in the early days — the
result, 37% of the product was off-spec in Q1. Could be that the
corner was already turned here. Less than 7% of total Q2
production of bio-succinic acid was off-spec.

4. Cash and inventory on hand.

The miseries imposed by a cash drain need no great emphasis here,
for readers who have worked on early-stage ventures in the cash-
burn phase. Suffice to say, if there’s one type of burning
sensation in the Valley of Death more painful than the others,
it’s usually the cash burn. Cash is a little light in BioAmber
world — but the burn rate is low. There’s $5.5M on hand as of June
30, compared to cash on hand of $6.9M on December 31, 2015. The
company added in its quarterly earnings call that it closed on an
additional $7.6M from the previously disclosed BDC Capital loan.
So, liquidity is assured for now, but a dilutive capital raise may
be in the cards before the venture breaks even at Sarnia. We’ll
keep an eye on that one.

Another item to note is that the company has 1,200 metric tons of
product inventory on hand as of Q2. The plant has a rated capacity
of 30,000 tons — so, it’s not a big pile-up, but worth watching as
both a source of future cash and as a sign that BioAmber’s
deliveries are timing well with its production.

5. Overheads.

Project watchers have been keeping an eye on R&D expense,
which had ballooned to $5.0M in Q2 2015 as the company readied to
launch the new commercial plant. Happily, that’s tumbled to $1.5M.

Interestingly for a company going through a ramp-up, sales
expense is dropping. In Q2 2015 the figure hit $1.1M for the
quarter, but dropped to $584K in Q2 2016. The company noted that
stock option value has dropped as the value of the company’s stock
has declined. If the stock begins to rise, that’s go up again. But
it’s also a sign that the company’s embrace of a big offtake
relationship with selected partners such as Vinmar is going to
keep that expense lower than at projects that opt to sell direct
to customers.

Reaction from Planet BioAmber

“BioAmber continues to meet ramp-up expectations at its Sarnia
plant. We have made excellent progress in the plant’s reliability
and performance, while continuing to increase production levels
and drive down unit costs,” said BioAmber CEO Jean-Francois Huc.
“Second quarter sales were on track, generating a 73% increase in
sales over Q1, while Q2 operations improved throughout the
quarter, culminating in a June uptime rate of over 80%. The team
is now entrenching its operating routines as our Sarnia facility
moves towards full production levels,” he added.

The Bottom Line

Progress? Excellent. One more quarter of results is probably all
that is needed to assure observers that BioAmber’s start-up period
is essentially over. Then, of course, the questions will be the
more usual ones of price and production volume. And in the world
of renewables, the rate of adoption by customers and the rate of
application development.

Which brings us to formulations. We raised this issue with
coverage of TerraVia last week. One of the real advantages of
succinic acid is that it can be used as a chemical building block.
We
noted in a review here
that “Bio-succinic acid forms the
basis for many high-value replacement products, including phthalic
anhydride, adipic acid, and maleic anhydride. Fumaric acid is
commonly used as a preservative in food and beverages, in the
production of paints and coatings, as well as in the production of
paper. It is the chemical equivalent of maleic anhydride (MAN) and
water, and therefore can be used as a replacement for MAN.”

So, we’ll be keeping a sharp look-out for evidence that
formulators are switching from petroleum-based feedstocks to
biosuccinic as a source for any or all of those. It will be a huge
demand driver, ultimately, not only for BioAmber but for Reverdia,
the joint venture between DSM and Roquette Frères, which in 2012 commenced
operations in Cassano Spinola
, Italy, at a 10K/yr
biosuccinic acid plant. And somewhere out there is the mysterious
Myriant venture, which opened its plant in Louisiana and drew a
thick iron curtain around the project’s progress.

Jim Lane is editor and
publisher  of 
Biofuels Digest where this

article

was originally published.
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