New EPA ruling allows Aemetis to significantly increase cash flow from Advanced Biofuels using Grain Sorghum (Milo) and Biogas
CUPERTINO, Calif. – January 2, 2013 – Aemetis, Inc. (OTCPK: AMTX), an advanced fuels and renewable chemicals company, announced that Aemetis was cited in a lead article in BioInvest Digest today regarding Advanced Biofuels. The BioInvest Digest article cited the unique cost advantages and significant potential increased cash flow by the conversion of the Aemetis 60 million gallon per year ethanol plant in Keyes, California to milo and biogas due to a new EPA Advanced Biofuels ruling that was published on December 17, 2012. Please see the article at BioInvest Digest – EPA Ruling Changes Economics of Advanced Ethanol Production or below is the text of the article.
The New Milo-naires: Corn, sorghum and the Invisible Hand of the Biofuels Market
Jim Lane | January 2, 2013
An obscure EPA ruling may change the economics of ethanol production, forever —
who wins, who loses, what’s the investor’s bottom line?
Just before Christmas, the EPA issued a final rule, determining that ethanol made from
grain sorghum at dry mill facilities qualifies as a Renewable Fuel under the Renewable
Fuel Standard — and that “grain sorghum produced at dry mill facilities using specified
forms of biogas for…process energy and…electricity, qualifies as an advanced biofuel
under the RFS program.”
Pretty technical stuff, and buried in the (…Zzzz) Federal Register, to boot. Hardly
knocking the fiscal cliff, Katy Perry, or ABC’s Rockin’ New Years Eve out of the
But it’s revolutionary for investors. Here’s why.
Savings on grain sorghum (milo) vs corn.
Right now, import costs for grain sorghum (as of Q4 2012) from Argentina – feasible for
ethanol plants with access to deepwater ports – is running $0.90 per bushel less than corn.
A reference (100 million gallon) ethanol plant would require around 36 million bushels
of sorghum, at full capacity. Savings vs corn? $33 million, or $0.33 per gallon.
Advanced Biofuels RINs
To qualify as an advanced biofuel, fuels have to be made from qualifying feedstocks and
achieve a 50% reduction in greenhouse gas emissions compared to conventional fuels. To
date, with next-gen capacity just now being built, the winners in qualifying for Advanced
Biofuels RIN’s have been biodiesel plants and imported Brazilian ethanol.
Now, those RINs are worth $0.40 each, compared to a nominal $0.03 for a corn ethanol
RIN. For a reference sized (100 million gallon) ethanol plant, the difference in value is
around $37 million, or $0.37 per gallon.
Increased cost for biogas
Now, biogas isn’t as cheap as, say, natural gas or coal-fired power. For our reference
plant, it runs around $13 million more. Now you can see why the switch-over from corn
to sorghum/biogas only makes sense in the context of the EPA ruling on RINs. There
simply wasn’t nearly as much upside to justify the time, money and aggravation in
making the switch.
The Bottom line
For the reference plant in our example, the net benefit is currently at $57 million per
plant, per year — pure operating cash flow. Or $0.57 per gallon.
It also makes the point that, as an investor, you should highly beware advisers who give
you platitudes like “The RFS drives up corn usage.” It can. But RFS, as in this example,
drives demand away — it is all a matter of plant siting, the logistics of power supply, and
seeing — ahead of other investors — how multiple input sources impact a process that
manufactures commodities (like DDGs or fuels) out of other commodities.
The Aemetis example
Aemetis (AMTX:OTC) operates a 60 mgy corn ethanol plant which imported milo from
Argentina in Q4 2012 at a cost savings of about $0.90 per bushel under corn. We require
approximately 22 million bushels per year at capacity, so the milo savings are more than
$18 million per year.
Add $18 million to the $24 million per year AB RIN’s, subtract about $8 million for the
increased cost of biogas, and the net increase in cash flow is about $34 million per year
for the 60 mgy (former) corn ethanol plant operated by Aemetis.
As Aemetis CEO Eric McAfee outlined for shareholders in a conference call just before
“[The] market disadvantage for corn ethanol facilities allowed Aemetis to acquire the 60
million gallon per year Keyes ethanol plant near Modesto, California. The plant
originally cost $132 million to construct, and was acquired in July 2012 by Aemetis for
only about $15 million in cash and approximately 11% of Aemetis fully diluted shares.
On an actual cash cost basis for the investors in the Keyes plant, this transaction values
Aemetis common stock at about $6 per share.
“Aemetis originally leased the Keyes plant in late 2009, and then retrofitted the plant to
implement Aemetis design upgrades at a total cost of about $8 million. The plant was
restarted in April 2011.”
Who else can benefit?
Not every ethanol plant in the world is going to be able to access these improved
economic opportunities — just yet. For now, the advantage for Aemtis occurs because it
is 40 miles from a deep water Pacific port, not a Midwest ethanol plant located 1,000
miles from the Gulf of Mexico (with transloading and rail costs).
For now, this EPA approval turns destination ethanol plants on the coasts into facilities
with a significant cost advantage in milo/biogas Advanced Biofuels. It also puts some
major attention on growers and developers of grain sorghum in the US – and Chromatin,
for example, has been hard at work in that field.
Potential winners for now? The Aemetis project; Pacific Ethanol (60 mgy ethanol plant
located in Stockton, CA); we also like the Pacific Ethanol plant in Boardman, OR
(adjacent to Port Morrow, largest port on the Columbia River); the currently-shuttered
Clatskanie plant in Oregon may also be a beneficiary.
Well, the risks are several. RFS2 is repealed or modified; corn prices sink materially
below grain sorghum; biogas prices skyrocket. Ethanol prices collapse as overcapacity
hits the ethanol blend wall. There are only a handful of public investment vehicles that
are correspondingly advantaged in the new economics.
Getting in on Aemetis
Today, Aemetis is still traded over the counter – one reason you don’t (yet) find it in the
Biofuels Digest Index basket of stocks.
However, in November, Aemetis retained one of the largest audit firms in the US,
McGladrey, and completed audits to become a fully reporting public company in
November 2012—and filed for a NASDAQ listing and is currently active in the
NASDAQ listing process.
Due to the filing of the audits and quarterly financial statements, Aemetis has now
received Blue Sky approval in approximately 40 states. The planned NASDAQ listing is
expected to provide Blue Sky approval in all 50 states.
End of BioInvest Digest article dated January 2, 2013.