Cash may be king, but the market was in no mood to celebrate after renewable oil manufacturer Solazyme (TVIA) registered a debt offering of up to $115 million and common stock sale of up to 5.75 million shares. The offering eclipsed news of a new product lineup, Encapso, for the oil and gas drilling services industry.
Source: Google Finance.
Investors may be perplexed as to why a company with nearly $167 million at the end of 2013, and entering the ramp-up phase for its first two commercial scale facilities in Clinton, Iowa and Moema, Brazil, would need to suddenly add up to $200 million to the coffers. What will the cash fund? Should you expect delays at Moema?
Why raise cash now?
Solazyme management has done an excellent job in guiding operations to success thus far and not overpromising the potential of its technology platform. Aside from capturing development partnerships, purchase agreements, and supply contracts with multiple partners in multiple markets, management has carefully choreographed announcements and business updates. For instance, the last debt offering of $115 million was announced simultaneously with the award of a $120 million loan (now just $108 million thanks to inflation) from the Brazil Development Bank, or BNDES. Announcing the launch of a new and unproven product line may not carry the same weight as the BNDES loan, but the field success of Encapso makes its future potential quite compelling.
So, why raise cash now? Solazyme is simply taking advantage of current market conditions -- and a relatively lofty share price -- to further bolster its balance sheet. The company could raise gross proceeds of $180 million, assuming overallotment of both debt notes and common stock, which would give the company roughly $300 million in cash at the end of the first quarter of 2014. Sure, you could make the argument that shares will go higher with future announcements, progress, and growing revenue, but we have no idea what discussions management has entered into behind closed doors. Perhaps it wants to wrestle more favorable terms for expanding its manufacturing capacity with a feedstock supplier. After all, another $180 million in cash provides a bit more bargaining power.
Manufacturing plans
Management has not been shy about its intentions to pursue additional capacity from the combined 120,000 MT of annual nameplate capacity of Clinton and Moema. Solazyme has up to 200,000 MT of additional capacity penciled into its joint-venture with Brazilian sugarcane supplier Bunge (either at Moema, new global sites, or some combination of the two) and a similar agreement with Archer Daniels Midland to expand Clinton to 40,000 MT and then 100,000 MT. Moreover, there are additional opportunities for expansion, such as acquisitions of an existing facility (a brownfield site) with permits and licensing in place or co-location agreements for new facilities (a greenfield site) with outside feedstock suppliers. The debt offering should be viewed as a springboard, not a cinderblock.
Is Moema delayed?
I would not conclude that Moema is delayed because the company decided to raise cash now rather than later. In my mind, raising cash for manufacturing expansion and bringing the final pieces of equipment at Moema online for ramp-up are completely separate issues. Besides, management has already admitted that while fermentation (production of saleable product) is expected to begin in March, downstream processing will not be ready until April.
Source: Solazyme.
Utilities? Check. Quality control labs, media preparation, and automated compliance systems? Check. Seed trains (the small bioreactors that grow the cells used in production to the correct concentration before transfer to the production bioreactors) and production bioreactors of 625,000 liter volumes? Check (any day now). Downstream processing? Awaiting the results of commissioning.
I will float one idea out there. There is a chance the company is running into minor problems with its recovery equipment at Moema. Remember, the downstream processing of Clinton is conducted many miles away at a third-party site operated by American Natural Products in Galva, and prior processing has been conducted at other third-party or partnered refining sites. Thus, Solazyme may not have direct (or as much) experience with that part of the process. If that is the case, it would only result in a short-term delay without long-term implications, although the effects to 2014 revenue would be unclear at this point. It would not be a major reason to worry, however, assuming the hypothetical delay is just a minor delay to get things right.
Foolish bottom line
Dilution is never a good thing, but Solazyme is in a pretty enviable position to raise much needed capital for future expansion on relatively favorable terms. It would be much worse if the company had to raise cash to fund basic operations after running into major production problems, which is clearly not the case. The market may not like it, and shares could fall further from here for various reasons, or if Moema is delayed, but the long-term vision of Solazyme remains in place. The company will be a steal at $1 billion, assuming all goes right from here on out.
