What Will Start-Up Mean for Solazyme, Inc. Investors?

The last time management at industrial biotech and renewable oils manufacturer Solazyme (TVIA) spoke with investors, they announced that commissioning, or the testing of process equipment to ensure it meets design parameters, had begun at each of its first two commercial-scale facilities with Bunge (BG -2.28%) in Moema, Brazil, and Archer Daniels Midland (ADM -1.25%) in Clinton, Iowa. That means the next major announcement to hit the wire will notify shareholders of start-up of commercial operations -- and it should occur any day now.

The two biorefineries will (eventually) allow Solazyme to produce large volumes of products for the first time and shed its "developmental" title. Additionally, successful implementation of the new technology platform will be welcome news to sugar behemoths such as Archer Daniels Midland and Bunge, which are struggling with low margins in their processing businesses and battling uncertainty surrounding ethanol, their biggest chemical product by volume. Thus, the stakes for facility start-ups in 2014 are higher than usual for an industrial facility. What will it mean for the companies involved and, most importantly, investors like you?

More patience required
Investors must remember that "flipping the switch" at Moema or Clinton will not make an immediate impact for Solazyme, Bunge, or Archer Daniels Midland. While shares will likely get a boost from any announcement, improvements in commercial production will not be noticed until the second half of the year. Why not? Solazyme and its production partners will not begin producing from nameplate capacity, but rather from a small base of production and ramp to nameplate capacity over a period of 12-18 months to ensure equipment and process scheduling work as designed.

The dotted red line represents nameplate capacity. Source: Solazyme 3Q13 earnings presentation.

The graphic above means two things. First, Bunge and Archer Daniels Midland won't be able to sell large amounts of feedstock -- sugarcane crush (sucrose) and corn (glucose), respectively -- until ramp-up reaches a suitable level. Both companies have long-term feedstock supply agreements with Solazyme in place, so this is only a short-term development. Second, investors won't notice (for the most part) the operation of Moema or Clinton in the top or bottom line until ramp-up approaches nameplate capacity. That makes it extremely unlikely for Solazyme to meet the expectations of Wall Street in 2014.

However, Solazyme will be able to take advantage of economics of scale as production capacity expands, thus leading to lower production costs and higher average selling prices. It will just require a little more patience on the part of investors.

Source: Solazyme 3Q13 earnings presentation.

The realities of ramp-up should serve as a reminder for investors not to change their investment strategy due to any potential gains in shares caused by the expected announcement of start-up at Moema or Clinton. Of course, the story of Solazyme extends far beyond the next 12-18 months. What can investors in all three companies expect in the longer term?

What does the future hold?
You'll notice that the production curve in the first graphic above steadily rises above nameplate capacity. That's because engineers at Solazyme will gradually learn more about their processes and make incremental improvements to increase microbial yield, productivity, and titer. Investors can also expect next-generation strains for each oil profile to be introduced in the future, which will further improve the company's processes and lead to even bigger margins.

Additionally, Solazyme and its commercialization partners will continue to develop and introduce novel products with its far-reaching synthetic biology platform. That will spread risk from commodity price volatility across multiple products in multiple, unrelated industries. That's pretty powerful. For instance, if there's weakness in the fuels market, then Solazyme's margins could be lifted by strength in the C18 market and so on.

Investors also shouldn't overlook what successful deployment of the company's process on a commercial scale will mean for its future. Solazyme will be able to attract feedstock suppliers to its platform and negotiate the expansion of its technology on a global scale once Moema and Clinton reach steady state operations at higher levels of capacity (not necessarily at nameplate).

Foolish bottom line
The announcement of start-up at Moema and Clinton has the potential to lift shares as investor excitement over the achievement of another developmental milestone boils over. However, you must remember that there are plenty of obstacles that await the company during ramp-up and that success on the provided timelines is not guaranteed. Nonetheless, investors have plenty of long-term catalysts to look forward to at Solazyme, which has the potential to spur growth for feedstock suppliers Bunge and Archer Daniels Midland. Just remember to pinch yourself before getting too excited about a press release.