KiOR Uproar: Plant Shutdown and Condoleezza Rice Resigns

Editor's Note: A previous version of this article misstated KiOR's end of year cash balance. KiOR closed out 2013 with $25 million in cash.  

Everyone loves when a plan comes together. Someone forgot to tell that to Columbus. Image source: KiOR.

After receiving certification from the U.S. Environmental Protection Agency for its drop-in cellulosic gasoline and cellulosic diesel in 2012, next-generation fuels producer KiOR (NASDAQ: KIOR  ) began 2013 with grandiose expectations for its first commercial-scale production facility in Columbus, Miss. At nameplate capacity the $213 million biorefinery would consume 500 bone dry tons of wood chips per day, churn out 13 million gallons of product per year, and sell to well-funded customers such as FedEx and Catchlight Energy, a joint venture between Chevron (NYSE: CVX  ) and Weyerhaeuser (NYSE: WY  ) .

It's a solidly profitable idea on paper: Take low-cost feedstocks such as pine pulp from low-margin industries such as paper manufacturing and cheaply covert them into drop-in fuels and heating oils. It has yet to be proved viable in real life, however. Last year was full of disappointments and setbacks, although no one said ramping a new technology platform for the first time was supposed to be easy.

Things didn't get any rosier for investors during a 35-minute operational update from management on Thursday morning, which dropped shares nearly 6%. While yet another plan for achieving economic operations was described to investors, outsiders also learned of multiple developments with scary implications. The news comes a few weeks after Condoleezza Rice (yes, that Condoleezza Rice) resigned from the Board of Directors, although there was no disagreement with the company. Will the company be able to right the ship in 2014, or should investors lower the life boat and row away as fast as they can?

Production update for 2013
Management opened the conference call by immediately crushing investor hopes for any good news. Despite announcing that Columbus would notch fourth-quarter production of 410,000 gallons as recently as Dec. 23, management admitted the number was actually 385,000 gallons. Why the estimates are 25,000 gallons apart is quite a head-scratcher, especially considering that the biorefinery has been idle since Dec. 17. Don't be quick to ignore the discrepancy, either: There are several more I'll bring to your attention.

For the full year, Columbus produced just 894,000 gallons of products and shipped 597,000 gallons (252,000 gallons in the fourth quarter). That's a far cry from initial production guidance released in November 2012. Of course, over-promising is nothing new for KiOR.

Date

Guidance

Period

Actual

Nov. 8, 2012

500,000 to 1 million gallons of blendstock sales

Q4 2012

33,724 gallons of blendstock sold

March 18, 2013

3 million to 5 million gallons of production

2013

894,000 gallons produced

May 9, 2013

300,000 to 500,000 gallons of production

Q2 2013

133,000 gallons produced

Nov. 7, 2013

>1 million gallons of production

2013

894,000 gallons produced

Dec. 23, 2013

920,000 gallons of production

2013

894,000 gallons produced

Sources: SEC filings, KiOR press releases.

Believe me, I want the technology to work, produce tens or hundreds of millions of gallons of drop-in fuels each year, and bring back hope for shuttered paper mills around the country. My major in college was closely related to my university's paper engineering program, so I witnessed firsthand plant closings, job losses, and a scrambling within the industry to find higher margin products. Unfortunately, investors have to value the technology's performance to date at face value and, at this point, question the competence of management.

Aside from continuing to overestimate the performance at Columbus, management announced plans to build a second production facility (named Columbus II) in addition to following through with a planned facility in Natchez, Miss. It sounds like a good long-term plan at first -- and it may work out -- but the facilities will cost a combined $825 million to build in addition to increased capital expenditures associated with its original Columbus biorefinery this year. 

Financial obstacles remain
I don't know if 2014 will be any different for KiOR, but I do know that not providing production guidance for the year is perhaps the smartest move management has made to date. The latest plan calls for Columbus to be idled in the first quarter to install additional equipment and test operational improvements, which will increase process throughput, yield, and efficiency. If all goes according to plan (sound familiar?), the biorefinery will ramp from just 300 bone dry tons per day of biomass and conversion rates of 30 gallons per bone dry tons to nameplate capacity of 500 bone dry tons per day and 72 gallons per bone dry tons by the end of this year.

The upgrades will require an additional $10 million, while research and development goals will require $22 million for 2014. That poses an obvious problem. While idling Columbus will slash expenses, a history of operational setbacks coupled with uncertainty regarding the EPA's proposed renewable volume obligations for 2014 is enough to make any would-be investor think twice. Not surprisingly, the company remains in a pinch in its search for future financing. 

Even larger, better financed partners such as Chevron and Weyerhaeuser appear to be keeping their distance. That's at least a little surprising, considering the cost advantages KiOR's platform could provide to Chevron's refining business, although the company may be hedging its bets now that biofuel volumes are being reduced. Similarly, Weyerhaeuser could secure an additional market for its pulping business -- or waste products in general -- by building a close relationship with KiOR for future facilities. The hesitance of larger partners and customers to finance operational improvement projects should make you think twice about parking your money in the company's stock, too.

Foolish bottom line
Can KiOR ever demonstrate the economics of its thermocatalytic process to investors? The company and its shareholders will probably learn the answer in 2014. Successful implementation of key operational improvements would allow the company to attract critical financing for operations and two additional commercial scale facilities with a total nameplate capacity of 53 million gallons per year. Failing to make the necessary process upgrades would likely jeopardize the existence of the company. For now, investors should stick on the sidelines until significant financial and operational improvements are achieved. The technological hurdles currently facing KiOR, as well as the resistance of partners such as Chevron and Weyerhaeuser to provide funding, present too much risk to justify an investment. Execution questions swirling around management shouldn't be overlooked, either. My advice: Don't get cute. There are plenty of other investment ideas out there.

Make like Condoleezza Rice and pursue other interests
You don't get style points in investing. While wood chips to fuel technologies sound awesome, they have significant work ahead of them to become viable investment opportunities. Looking for another idea? Consider that record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, The Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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  • Report this Comment On January 12, 2014, at 11:05 PM, CrouchingTiger35 wrote:

    Dear Maxx,

    Thank you for the information, I was there for the conference call as well. I would like to correct a couple of things.

    I. The KiOR CEO Fred did say $25,000 cash left, but the interrim CFO, Chris Artzer corrected Fred's number later -- it should be $25 Million cash on hand.

    II. My understanding is -- KiOR is not an ethanol maker. They make next generation biofuels (gasoline and diesel) which have exactly the same structures with the fuels you fill in tank.

  • Report this Comment On January 13, 2014, at 12:23 AM, olgaok wrote:

    At nameplate capacity the $213 million biorefinery would consume 500 bone dry tons of wood chips per day, churn out 13 million gallons of product per year....

    Not too impressive when compared with this technology

    Sustainable Power Corp Biofuel/Biochar Facility

    Contact name: Michael Garjian, CTO and Chairman of the Board

    Contact telephone: 413-626-1070

    Contact email: m.garjian@sstp.us

    Grant amount sought: $50,000,000 for ten tube production facility

    Total project cost: $70,000,000

    Equity/cost share contributed by project owners/partners: 28%

    Fuel type (if applicable): Vertroleum Biocrude, biogas, and biochar

    Feedstock (if applicable): Ag Waste, Cattle Manure, Municipal Solid Waste Wastewater Treatment Solids, Soybeans

    Processing technology (if applicable): Catalytic Vacuum Pyrolysis

    Transportation technology (if applicable): Heavy Fuel Oil Engines that can use Vertroleum Biocrude. Other engines using Vertroleum bio-gasoline, bio-jetfuel, and other bio-distillates. Turbines using biogas to generate electricity for hybrid electric vehicles.

    Project description: Sustainable Power will install ten reactor tubes capable of producing a total of 63,000 gallons of Vertroleum, 26 tons of biogas, and 139 tons of high grade activated biochar per day when using biomass as a feedstock. When using municipal solid waste (paper/plastic pellets) the facility will produce 370 tons per day of biogas with a heat value of 1,700 BTUs per cu ft (44MM BTU/ton) compared to 1,000 BTU/cu ft for natural gas. Facility will draw from the local agricultural/urban region and will supply electricity to the grid, Vertroleum to applicable end users or refiners, and biochar to the agricultural industry.

    Proposed Project Partners: A major research institution may be involved but must remain confidential at this time pending final agreements.

    Proof of concept to date: Pilot plant has been built. All outputs have been tested by independent labs or AmSpec Services, LLC. Texas A&M University has validated the process. Dr. Thomas Hartwick has rendered a positive opinion on the mass scalability of the process. See test results at www.sstp.us

    Sustainability: This carbon negative facility uses everpresent waste products as feedstock. While biofuels will replace fossil fues, the Biochar Xtra will help to detoxify soil aflotoxins, renew depleted spoils, improve nutritional density of crops, and reverse global warming by removing carbon from the atmosphere. Phase 2 of the project will also power indoor facilities to grow organic, nutrient dense crops in inner cities employing inner city residents at living wages with benefits and profit sharing. This will make inexpensive organic foods available to inner city residents while returning unused urban buildings back to tax rolls and establishing a new local food manufacturing industry in the USA.

    Oil price parity: $63.00 per barrel

    Capital expenditure. Less than $2.10 per gallon

    Yield: Equivalent to 190 gallons per ton of soybean.

    Timing: June 2011start-up.

    Estimated greenhouse gas reductions achieved: Facility will remove 457,700 tons of CO2 per year per 10 tube facility. We anticipate this first facility will result in additional facilities totaling 1,000 tubes over 5 years. One thousand tubes would result in a 46 million ton reduction of atmospheric CO2 per year.

    Estimated direct jobs created 60 per ten tube facility (6,000 for 1,000 eventual tubes)

    Estimated indirect jobs created 50 to 100 per ten tube facility. (5,000 to 10,000 for 1000 tubes).

    http://www.biofuelsdigest.com/bdigest/2010/04/13/youchu-2010...

  • Report this Comment On January 13, 2014, at 3:32 AM, stockanal45 wrote:

    Next stop 99 cents/share!!!

  • Report this Comment On January 13, 2014, at 10:31 AM, TMFBlacknGold wrote:

    @CrouchingTiger35

    "My understanding is -- KiOR is not an ethanol maker. They make next generation biofuels (gasoline and diesel) which have exactly the same structures with the fuels you fill in tank."

    That's correct, and I stated that from the beginning.

    Thanks as well for notifying me that the CEO comments on $25,000 in cash on hand were incorrect. I missed the correction at the end of the call. A fix and editor's note will be made.

    Maxxwell

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