Renewable oils manufacturer Solazyme (TVIA) announced a commercial supply agreement with Unilever (UL -0.02%). The pair has worked together on multiple projects in the last five years, from developing novel oil profiles to seeing just how far Solazyme's platform can go. Apparently, they're only scratching the surface.
The deal will see Solazyme supply Unilever with 10,000 metric tons (MT) of tailored algal oil beginning in early 2014. Both companies expect the full amount to be purchased within 12 to 18 months from the first delivery. Looking beyond the press release, what does this commercial agreement mean for Solazyme investors?
What does it mean?
Solazyme will produce oil for the contract through its venture with partner Bunge (BG -0.99%), called Solazyme Bunge Renewable Oils. The company's first commercial scale facility is located in Moema, Brazil and will produce 100,000 MT of oil annually after a 12 to 18 month ramp-up. Moema is expected to be commissioned and started-up in the fourth quarter of this year.
Supplying commercial quantities of oil to Unilever -- even such a small amount -- will take some pressure off of the company to fill its initial production volumes. I don't think Solazyme will have any problem doing that, but with only one quarter remaining to announce additional supply contracts, it is a real concern for investors.
Also consider that the smoother operations go at Moema, the more likely it is Bunge expedites the process for using Solazyme's platform elsewhere. The two companies have made preliminary agreements to add 200,000 MT of capacity at Bunge mills in the next several years. That would keep the growth story going for quite some time -- it represents a 167% boost to production capacity currently under construction! -- and reward investors handsomely.
What to expect next?
This initial deal may look pretty small, but the future looks bright for the partnership. Unilever intends to source all agricultural raw materials from sustainable sources by 2020, which represents a massive opportunity for Solazyme -- one of the few companies to date that has the capabilities to help reach that goal. Assuming all goes smoothly I would expect this to be the start of a big, long-term relationship for the companies. Unilever has its hands in dozens of products in personal care, food, soaps and detergents, and more -- all in the bulls eye of Solazyme's platform.
Source: Solazyme Presentation, Jefferies Global Industrials Conference
Perhaps Unilever's supply chain can only absorb 10,000 MT of Solazyme's algal oil in the next 12 to 18 months. That is a possibility given logistics and supply chain sensitivities. But perhaps the fact that the length of time of the supply agreement matches up perfectly with Moema's ramp-up schedule is no coincidence. Unilever could be getting its foot in the door early now in order to secure a larger future contract when Moema is running on all cylinders. They help Solazyme (one of their investments) get on its feet, and in return Solazyme helps them meet their sustainability goals. It's a win-win.
Foolish bottom line
The announcement is good news for investors and seemed to have lifted Solazyme's shares from the rut they have found themselves in over the past three months or so. Will it just be a temporary boost? Perhaps, but don't forget that an announcement on the commissioning and start-up of Moema is potentially weeks away. Investors should also be looking forward to additional commercial supply agreements with other partners. Things can always go wrong with any investment, but it may be time to begin building your long-term position.
