How I Rank Solazyme's Partnerships

Thus far, Solazyme (NASDAQ: SZYM  ) has retained the attention and checkbooks of every major partner originally brought onboard. That of course, is aided by consistently hitting internally set goals and having impressive science under the hood. As investors cheer each new development, they should stop and ask themselves which collaborations are the most important to the company's future.

Knowing that not all partnerships are created equally, which friendships should investors be keeping an eye on? Here's my list of the most important deals inked by the developmental stage company to date.

1. Upstream: Bunge and Arch Daniels Midland
Solazyme's S1 filing stated that it takes roughly 20 metric tons of sugarcane crush to produce one metric ton of renewable oil. In other words, inputs to the process are arguably the most important part of the entire platform. That makes the company's feedstock agreements with Bunge (NYSE: BG  ) in Brazil and Archer Daniels Midland (NYSE: ADM  ) in the United States the most important partnerships.

I have a feeling that once investors get their first glimpse of production costs in 1Q14 they will keep the two partners at the top of the list for the foreseeable future. Why? Regardless of what Solazyme can reap on the open market for its finished products, prices won't mean much if costs are not minimized. Consider that sugarcane prices are expected to hit $35 per metric ton this year and sugar yields are hovering near 13%. Taking that into account, Solazyme's sugar cost would quickly balloon the price for every metric ton of oils if sourced on the open market.      

Production costs anywhere near several thousand dollars per metric ton would make the company's renewable oils dead in the water, which highlights the absolute importance of feedstock agreements and joint ventures with Bunge and Archer Daniels Midland.

2. Downstream: Chevron and UOP Honeywell
What good is feeding sugar feedstocks to your heterotrophic algae if you can't add the finishing touches downstream? Chevron and UOP Honeywell (NYSE: HON  ) offer Solazyme just that, as well as a potential window to various customers with cash in hand. Both refiners have aided the company for its military contracts, but have yet to formalize any major collaboration with integrated biorefineries currently under construction. It only makes sense for each to expand its relationship with Solazyme and I fully expect them to stick around for the long term.

Why is this so important? Solazyme would have access to world-class refining equipment and expertise. Of course, there is no shortage of refiners scattered throughout the globe, but UOP Honeywell should be of particular interest to investors. The company has a sizable footprint in the renewable fuel industry and is even listed as the 11th "Hottest Company in Bioenergy in 2012-2013" by Biofuels Digest. Solazyme stole the top spot.   

3. The military
A simple truth in business: if you are looking for any two industries willing to pay any price to get something accomplished then you should circle health care and defense. Despite widespread criticism, Uncle Sam's swords and shields haven't been shy about announcing their commitment to biofuels. The allure of producing fuels domestically, on site, and in sizable quantities has attracted some pretty big checks from the Navy and Air Force, which could be the single most important partnership for the biofuels industry.

It should be no surprise then that the military offers a potentially lucrative revenue stream for Solazyme. Although the company expects no further collaborative revenue from Uncle Sam entering 2013, it could be one of the first to offer large quantities of drop-in fuels for such strategic applications. Mainstream biodiesel blendstocks that are fatty acid methyl esters, or FAMEs, have caused problems with military truck and marine engines in the past. While Solazyme offers Soladiesel BD, a FAME fuel, it also offers renewable drop-in fuels such as Soladiesel RD, Soladiesel HRF-76, and Solajet. The latter three are the target of the military.

Solazyme's dealings with the armed forces over the years have received an unfair amount of criticism. It is easy to gasp at the $26 per gallon price tag, but that included the cost of new pilot scale equipment. As the company reaches scale and gradually lowers the cost of production to its goal of $1,000 per metric ton of oil – the same price as bulk jet fuel – the prospects for profitability will improve. Unfortunately, the industry and the military will be open to criticism while both wait for commercial scale to come on line in the next several years.

Investors will also need to watch the competition. Although left for dead by the market after a calamitous 2012, Amyris (NASDAQ: AMRS  ) has reset expectations and will enjoy a full year of production from its first commercial scale facility in 2013. The company's farnesene is capable of serving as a chemical building block for an impressive list of value-added products and low-margin drop-in fuels.

4. Mitsui
The recently announced collaboration with Mitsui got a lot of attention and sent shares soaring, but $20 million spread out over several years amounts to pocket lint for the Japanese conglomerate. Consider that Mitsui raked in $2,650 million in profits in the last nine months and owns $22 billion of the global crude raw materials market for the oleochemical industry.

It would have been nice to see a larger commitment from such a financially strong company. Earmarking $100 million toward the deal wouldn't have broken Mitsui's back, but could have gone a long way to help Solazyme bring its oils to the market.

Still, it doesn't make the news irrelevant. Should the companies expand their relationship down the road, Mitsui could become a crucially strategic partner for Solazyme by giving it direct access to high-value-added product streams, market distribution networks, dozens of customers, and likely lead to massive capacity expansions. Therefore, I would rank it above Roquette Nutritionals and Sephora's distribution partnership on potential alone.

Foolish bottom line
There are obviously more partnerships for Solazyme not listed here that I will cover in more depth in future articles. Investors know that high-margin oils in health sciences, nutritionals, and home and personal care markets are vitally important as well, but even higher market prices won't make up for their initially limited volumes. Therefore, these are the six most important partnerships for the developmental stage company, each of which can help swipe away risk for investors.

However, being a small company still has its drawbacks. Solazyme has agreed to split revenue at its largest biorefinery in Brazil and still may not own enough chips to play tough with larger partners. That day will come if the company can continue to execute near perfection. Until then investors will need to know how to rank the stable of partners brought onboard, and I hope the list above is a great first step.

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Read/Post Comments (18) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2013, at 6:54 PM, EmFetch267 wrote:

    What is the point of this article?? I have also followed this company for a long time. Why do you continue to write about this company and bash it at the same time with your overly cautious doubts?

  • Report this Comment On February 27, 2013, at 7:20 PM, EmFetch267 wrote:

    Sorry Maxx Chatsko. I apologize as I know you are trying your best in being an "expert" on this company. You certainly know the company better than many of your fellow fool writers. I am just frustrated at some of your past articles that clearly missed the point and reading pointless articles like this just make me frustrated. You are at least paying more attention to the company now and are beginning to understand what is going on. Sorry for my bitterness.

  • Report this Comment On February 27, 2013, at 7:25 PM, lntwo wrote:

    I'm going through the 03/11/11 S-1, on which page is the 20:1 conversion efficiency?

    Thanks

  • Report this Comment On February 27, 2013, at 7:32 PM, TMFBlacknGold wrote:

    @EmFetch267

    Thanks for starting a Fool account today to keep up with my writing. This is part of a "larger picture view" project of the company.

    While I stand by my work from the Foolish Blogging Network, I'm firmly in the camp of "if you're not embarrassed by your previous work, you aren't learning or growing". I understand my cautious views on the company aren't in line with much of the optimism - and I wholeheartedly believe Solazyme is the best publicly traded company in the sector - but I do see a lot of people overlooking the risks in favor of the rewards.

    Just trying to pull the discussion back to the middle.

    Fool on!

    --Maxxwell

  • Report this Comment On February 27, 2013, at 7:36 PM, TMFBlacknGold wrote:

    @Intwo

    Page 45 above "Key Milestones". It seems ridiculously high to me, but you have probably noticed that the company was targeting 750,000 L bioreactors in its 10-K and just 625,000 L in more recent filings. Perhaps their strains are more robust now.

    --Maxxwell

  • Report this Comment On February 27, 2013, at 7:40 PM, EmFetch267 wrote:

    I too would like to know where this supposed 20:1 conversion rate came from.

  • Report this Comment On February 27, 2013, at 7:41 PM, EmFetch267 wrote:

    Thank you for the information, Maxx

  • Report this Comment On February 27, 2013, at 7:46 PM, EmFetch267 wrote:

    I think you should have stated that it was "8 million metric tons of annual sugarcane crush capacity" that the company "believe would be sufficient to supply manufacturing capacity of 400,000 metric tons of oil per year"

    Crush capacity isn't the same as sugar cane itself if I recall.

  • Report this Comment On February 27, 2013, at 7:49 PM, EmFetch267 wrote:

    I remember you had previously written about a 30% conversion efficiency a long time ago. Where did you see that in the S-1?

    (Thank you for the welcome by the way. I thought it was about time to get my voice into some of the articles here)

  • Report this Comment On February 27, 2013, at 7:53 PM, EmFetch267 wrote:

    You stated that back here: " It was stated in Solazyme’s S-1 filing that the company can produce 0.3 g of oil from 1.0 g of sugar"

    http://beta.fool.com/blackngold/2012/02/09/fueling-tomorrow-...

  • Report this Comment On February 27, 2013, at 8:18 PM, TMFBlacknGold wrote:

    @EmFetch267

    Yes you are correct. That should read "20 metric tons of sugarcane crush", which pegs the number around 3-4 metric tons of sugar needed for each 1 metric ton of oil produced

    Looking back at my notes from the previous blog post: I have that sugarcane crush contains about 17% sugar (actually lower in some harvests). My Excel sheet has the correct number, I must have read the line above it (pre-conversion) for this article. My mistake.

    Note that the input costs remain the same however, at around 40% of the total production cost. So ADM and Bunge are still the most important ;)

    --Maxxwell

  • Report this Comment On February 27, 2013, at 8:50 PM, lntwo wrote:

    I say this dumbfounded and incredulously - "omFg (emphasis mine) are you F (see previous) drunk"?

    ( I am, hence the F). So you took the number from an excel spreadsheet but say: "Solazyme's S1 filing stated that it takes roughly 20 metric tons of sugar to produce 1 metric ton of renewable oil". What do editors make at MF - I'm looking for a job.

    So really, the input costs are the same? Please, show me THAT math. Sheesh. Tighten things up kid.

    Good job EmF.

  • Report this Comment On February 27, 2013, at 10:36 PM, TMFBlacknGold wrote:

    @Intwo

    The costs remain the same because 20 million metric tons of sugarcane crush is still the same amount of sugar (~3-4 million metric tons) used in my price calculations. All of the numbers needed for the math are provided above.

    Not everyone has the same opinion as you or other bloggers that you wish to follow who do not have editors and only blog about their personal holdings. Embrace the fact that risk exists with all investments!

    Fool on!

    --Maxxwell

  • Report this Comment On February 28, 2013, at 12:12 AM, lntwo wrote:

    I don't question the risk, or your opinion on the stock, nor did I offer anywhere my opinion on the stock.

    I just questioned your demonstrated lack of attention to detail.

    Of course ADM and Bunge are important, and this stock is STILL in the story phase. My issue is whether there is anything in the S-1 that says "... 20 metric tons of sugar to produce 1 metric ton of renewable oil". As you stated no such statement exists.

    Will you be reposting this article with the revision?? I'm betting no, but please, surprise me.

    Yes the subsequent numbers follow the reasoning, but this is not a trivial error.

    On another note, is the cane price an open market price or the cost of production for, say Bunge. Point being, with Bunge szym is not buying on the open market. Maybe the same is true for ADM with glucose?

  • Report this Comment On March 01, 2013, at 2:36 PM, 275GTB4 wrote:

    Wrong, yet again!!

    per original pre-expansion Bunge JV:

    300,000MT of product for 100,000MT of oil

    its 3 to 1.

  • Report this Comment On March 01, 2013, at 2:47 PM, 275GTB4 wrote:

    its 132 million dollars of sugar @ 20 cents/pound

    300,000 MT of sugar is produced from 2.1 million MT of cane.

    cane/sugar ratio is 7:1

    300,000MT of sugar is 660 million pounds.

    660 million pounds X .20 = 132 million dollars

    and lets face it they won't be paying 20 cents from Bunge.

    depending on what the oil is used for, revenue could be anywhere from 250 million per year, based on $2500/MT X 100,000MT nameplate capacity on up.

    Bunge breaks down everything to dollars per acre of cane..it costs them ~$51 per acre from field to harvest and currently they get ~$59-61 dollars per acre from cane...at $2500/MT they make about $119 per acre of cane. See why they like Solazyme....

    Get it now.....all info on Bunge website.

  • Report this Comment On March 01, 2013, at 3:08 PM, 275GTB4 wrote:

    woopsie..almost forgot

    electricity generation is 100% produced onsite from burning cane husks.

    free electricity should be good fro profits, huh?

  • Report this Comment On March 02, 2013, at 2:21 AM, 275GTB4 wrote:

    can anyone intelligently refute this

    if not, cover now

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