Many investors are wondering what the heck is going on with renewable oils and bioproducts company Solazyme (NASDAQ:SZYM), which has now delayed start-up at its 100,000 metric ton per year commercial-scale facility in Moema, Brazil for a second straight quarter after originally expecting production in the fourth quarter of 2013. The first delay, announced on the third-quarter earnings conference call last November, was caused by the installation of better quality-control equipment. It wasn't what Wall Street wanted to hear, but it will help the company switch between oil production for food, personal care, and industrial applications more easily, and with more confidence. Remember, switching between such diverse products with the same equipment is a quality-control issue that's unique to industrial biotech platforms.
The second delay, announced earlier this month on the first-quarter earnings conference call, pushed production into the second quarter. Solazyme blamed intermittent utilities coming from the adjacent co-generation facility from sugarcane producer and joint venture partner Bunge (NYSE:BG) as the culprit for the delay this time. Feel free to take those claims at face value or conjure up a conspiracy theory if you like -- I feel the problems are a bit bigger than has been publicly stated, but nothing that cannot be overcome -- but we're all at the mercy of management at this point.
In the meantime, I feel it's worthwhile to discuss the equipment at Moema from start to finish, as listed in the last several company presentations to keep things simple, to give investors a better understanding of the difficulty of reaching commercial operations. The first part of this four-part series will focus on infrastructure.
Utilities are the lifeline of a commercial facility
Investors may think production all comes down to fermentation and recovery, but that doesn't give credit to all of the supporting components (fermentation tanks simply make for better headlines). There are miles of pipes transporting steam, water, air, and electricity throughout the facility and breathing life into all equipment within the industrial plant. That's obvious, and it makes sense that Solazyme would have encountered problems commissioning equipment if the supply of utilities were interrupted.
What is less obvious is that industrial facilities often go with limited utilites for weeks each year, which will likely occur during the annual sugarcane interharvest period for Brazillian assets. Of course, Bunge and Solazyme will likely schedule downtime simultaneously to smooth out interruptions. But it's a major factor contributing to the "engineering year," or the number of days a facility is scheduled to operate in a given 12-month period, which is shorter than a "calendar year." So while Moema has a rated capacity of 100,000 MT, it will achieve that in 325-350 days of scheduled operations.
A full engineering year doesn't come into play for start-up and will be modified during ramp-up activities, but it's something to keep in your back pocket for future use. The idea of scheduled operations does, however, come into play for 2014. If Solazyme and Bunge cannot start operations in a timely manner, then it seems difficult to imagine the ramp-up schedule (modified engineering year for the remainder of this year) would not affect the timeline for reaching steady state operations and nameplate capacity.
Don't overlook these supporting systems
One step down from utilities on the importance hierarchy are cleaning, sterilization, and process control systems. Solazyme lists the following in its presentations:
- Clean in place, (CIP) -- allows piping and tanks to be cleaned with steam and solutions without being exposed to the outside environment (closed-loops stay closed).
- Sterilizers -- equipment used to eliminate possible contaminants from feedstock, media inputs, water, air, buffer solutions, and anything else going into the fermentation tank, in addition to any waste leaving the facility.
- Distributed control system, (DCS) -- allows engineers to monitor and control equipment throughout the facility from a central location.
If you cannot clean your equipment, then you cannot control the quality of your products. If you cannot sterilize your inputs or outputs, then you cannot effectively control contamination within your process or of the outside environment. And if you cannot monitor your equipment simultaneously from a central location, then you cannot have a commercial-scale facility. In other words, supporting infrastructure is incredibly important.
Foolish bottom line
As you can see, there's plenty more detail that goes into the infrastructure that supports Moema than is explained on the quarterly conference calls (and this is just the equipment listed!). This information may not affect your investing thesis, but I feel it's important for investors to understand what goes on behind the scenes at Solazyme and Bunge. Only then can we fully appreciate the magnitude of the challenge in bringing such a complex facility online. My hope is that this information will better educate investors should management fully explain its successes or failures in starting or ramping operations at Moema in the future. In part two, we'll take a look at the upstream components at Moema.
Investing in Brazil leaving you homesick?
If you don't feel comfortable investing in a shaky Brazilian economy, then perhaps you should think about investing in the record oil and natural gas production 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 look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.
Maxx Chatskohas no position in any stocks mentioned. Check out his personal portfolio, CAPS page, previous writing for The Motley Fool, or his work for SynBioBeta to keep up with developments in the synthetic biology industry.
The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.