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 (CVX 1.04%) and Weyerhaeuser (WY -0.25%).

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.

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.