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Published: February 8, 2010
This week brought a significant bit of news
in the ethanol world.
Industry-watchers might assume I'm talking about President
Obama's Wednesday announcement with the Energy and Agriculture
secretaries that a federal biofuel output quota schedule had
been finalized, a move that will encourage the production of 36
billion gallons in the United States by 2022.
That was a significant announcement. In fact, it was outright
huge. It's splendiferous news for shareholders of companies that
participate in the biofuel industry, especially cellulosic
ethanol, an advanced biofuel that can be made from any plant
material. (Traditional ethanol is derived from corn.)
The announcement I'm referring to, however, happened earlier in
the week. And outside of the country: Brazilian sugar and
ethanol producer Cosan Industria a Comericio (NYSE: CZZ)
struck a deal with Royal Dutch Shell (NYSE: RDS-B) to
create Brazil's third-largest fuel distribution network. It also
gives Shell a piece of the world's largest ethanol producer in
the top ethanol-producing country.
The joint venture is valued at $12 billion.
But here's the kicker: Shell has interests in Codexis, which
provides enzymes for fuel production and pharmaceuticals, and
Iogen, a cellulosic ethanol pioneer that Shell funds along with
Goldman Sachs and the Canadian government, among others. Shell
is folding those interests into this deal. It's going all in on
ethanol.
Fact: Codex relies on other companies' technology. It said so in
an SEC filing in late December 2009 as it enumerated the risk
factors facing the company:
"If we are unable to maintain license rights to a commercial
scale expression system for enzymes that convert cellulosic
biomass to sugars, our business may be materially adversely
affected."
The filing continues: "[Codexis] entered into a license
agreement with Dyadic … in November 2008 to obtain access to an
expression system that is capable of producing the necessary
biocatalysts for the commercialization of cellulosic biofuels."
In other words, if Codexis loses the right to use technology
owned by Jupiter, Fla.-based Dyadic International, Inc (OTC:
DYAI) it will find itself up the proverbial creek. It simply
doesn't have a way to ferment the natural sugars found in
plant-cell walls into alcohol without Dyadic's proprietary
enyzmes.
Think of the production of cellulosic
ethanol as a road.
Now imagine a toll bridge on that road.
Inside the toll booth: Dyadic. For every gallon of the stuff
that this new joint venture produces, Dyadic is due a royalty.
And believe it or not, this story gets even better.
You see, the license that Dyadic has with Codexis is
non-exclusive. That means Dyadic can dance with other suitors.
And that's why I mentioned the President's announcement.
The federal timetable with the nation's output targets calls for
the production, this year, of 100 million gallons of cellulosic
ethanol. That might seem like a lot, and it is -- because the
United States doesn't produce much of the stuff right now. The
reason is simple: There's not a commercial-scale cellulosic
plant operating anywhere in the country.
That is going to change, and quickly. It has to. That's the law.
By 2022, in fact, the law says the United States must produce 16
billion gallons of cellulosic ethanol. That's a +15,900%
increase.
Dyadic shares may well match it. They've certainly performed
well so far: I added them to my
Government-Driven Investing portfolio in early July 2009
and they've since already returned +220%. Dyadic already has
licensed its cellulosic technology to one other company, Abengoa
Bioenergy, and the company is working on signing other deals,
too.
There are two ways to make money from biofuels: Start buying
farmland in the hope that it will appreciate as cellulosic
ethanol opens new agricultural markets that will increase the
land's value -- or start buying essential technology developers
like Dyadic. Its remarkable performance in 2009 is likely the
first chapter in an epic saga of profits.
-- Andy Obermueller
Chief Investment Strategist
Government-Driven Investing |
