The ad I’m looking at today is from Jimmy Mengel, who we last covered when he was touting the “IRM(72) Retirement Plan” a few months ago — his The Crow’s Nest newsletter has been around for a year or so, touting a wide variety of things from the “next Warren Buffett” (Loews, which hasn’t worked out well thanks to the collapse at their subsidiaries Diamond Offshore and Boardwalk Pipeline) to uranium to silver… which, now that I look at that list, means his teaser picks have had a pretty rough year.
Now, that doesn’t mean the newsletter has necessarily done badly — we just go by the teaser pitches we see and respond to, we don’t know when he might have suggested buys or sells to his actual subscribers. And to be fair, he wasn’t the only one who was convinced that silver and uranium were ready to catch fire last Fall, those were probably near-consensus opinions among the hard-asset newsletter pundits — and uranium has at least recovered from its Spring and Summer swoon to get back to where it was a year ago.
So what’s he teasing now? His widely distributed ad pitches something he calls the “God Complex” — a place “hidden among the farms and fields of America’s heartland” … here’s how he gets the juices flowing:
“On the 2nd floor of… America’s ‘God Complex’
“A small team of scientists takes only three days…
“to create what takes nature 300 million years!
“The result is a $3 TRILLION technology
“Prepare yourself now for a $107,000 windfall…
“But only if you move BEFORE this company’s next big announcement”
Catches your attention, right?
“… a small team of elite scientists works around the clock, monitoring a process it’s spent more than a decade perfecting.
“The scientists work in a dull and nondescript building, mostly in rooms 205, 207, and 209 — rooms that are always kept dark.
“They’re the only people with access to these rooms, and they must clear three security checkpoints before they can enter.
“So it’s no wonder that few residents of Galva, Illinois realize what’s actually happening in their own backyards.”
And that’s actually enough for us to have an awfully good guess about what they’re pitching, but we don’t like to do guesses — so let’s check out some more clues from the ad.
Mengel says that investors are “clamoring” to get in on this stock, and that the scientists at the “God Complex” have perfected a way to create in three days what it took nature 300 million years to make — something he likens to being able to “control the weather”. More from the ad:
“The nature of these scientists’ work is SO extraordinary that it’s difficult to determine just how much you can stand to make from an early investment in their tiny company…
“About as tough as it is to compare this one-of-a-kind technology to any that came before it.
“It promises breakthroughs affecting everything from the food we put in our mouths and the soap we use to wash our skin to oil exploration and how we power military fleets.
“The impact has been felt 7,000 feet underground and 29,029 feet in the air.
“Long story short, this technology is one for the history books, and the profit potential is absolutely unheard of.”
So the hyperbole is pretty thick on the ground. But what are these scientists actually making, and what’s the company? Well, as is usual for a teaser pitch, they buried the lead:
“… inside the “God Complex,” they take one of the most abundant species on earth — algae — and convert it into something far more valuable: oil….
“Aside from fuel use, oil is necessary to manufacture plastic, medicine, clothing, soap, lotion, cosmetics, and countless other products… which is to say nothing of food.Are you getting our free Daily Update
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“And our tiny company is taking all of these markets by storm.
“Its tailored oils can replace virtually any other oil known to man.”
So yes, as you can probably guess now, Mengel is teasing the algae oil standard-bearer Solazyme (SZYM), which has been touted several times before largely as a biofuels company but is being pitched more broadly here as a specialty oils company by Jimmy Mengel.
Which makes sense — biofuels from algae are the headline-getter, but Solazyme can’t really make any money on that other than with their strategic deals with airlines and the US Military, who are willing to lose money to seed investments in renewable fuels that might eventually pay off. What they can make money with, at least theoretically, is highly customized oils for foods and nutraceuticals, industrial applications, or cosmetics.
They do this with algae, as teased — or microalgae, as they call them. The company’s work has largely been in developing and breeding very specific strains of algae that produce oils with specific characteristics that can be extracted from the algae and purified for pretty much any end-use, from processed foods to lubricants.
And I say they can “theoretically” make money with more specialized and value-added oils because, of course, they have never made money. The stock IPO’d in 2011 and has bounced up and down quite a bit, but has to this point never regained the promise of those early days when the initial public offering was a huge hit with investors. Their investments in new plants and products has meant that both R&D costs and operating expenses have continued to grow pretty dramatically, but revenue has not scaled up to match those increasing expenses.
They have now accumulated a loss of just about $400 million, so I guess the good news is that they shouldn’t be paying much in taxes anytime soon… and they do have a decent amount of cash on the books, enough to keep up the current $40 million in quarterly cash churn going for a while (thanks in part to an increasing amount of debt on the balance sheet), so I’m a little worried about their long-term safety because of that debt, but they’re not in an immediate crisis.
And they do have prospects for increasing revenues — but it has been a long, tough slog getting up to commercial production, with their large plant partnered with Bunge in Brazil coming close to completion and their smaller facility in Iowa increasing production, and it’s not clear to me when or how this commercial production will actually help them achieve profitability. You can see their latest quarterly presentation here, it is very heavy on future potential and “story” and very light on numbers.
It seems that their food ingredients and their cosmetics are seeing some pretty good traction, increasing sales particularly with their Algenist line of cosmetics, but from this level it looks to me like it’s going to take many, many quarters of 20, 30, 100% revenue growth in those businesses for the company to come close to the kind of scale that might bring profitability — this is a scaleable business to some degree, because bigger facilities like the Moema facility in Brazil should be more efficient, but the input costs are always going to be substantial… each batch of algae requires the same amount of sugar and heat and processing, etc. That does not in any way mean the company can’t become profitable, just that I assume it will require increasing revenue by at least 300% or so to have a chance of reaching profitability — and margins have been getting worse, not better, as they grow because they’re relying more on product sales for their revenue and less on joint ventures and license fees and research project funding from partners (the government and others).
On the positive side, they are growing revenue now and they are just at the cusp of pretty substantial increases in capacity with Moema coming online (they had some stumbles with that plant during construction/commissioning earlier this year, partly because of access to power) and with more customers for the growing production capacity out of Iowa, and they do have big partners and committed customers in AkzoNobel, Bunge, ADM, Unilever and others. And though some might not see this as a silver lining, the slow commissioning at Moema has helped the stock to stay quite moribund, it’s now right around its all-time lows at just over $7 (for a market capitalization of just about $550 million).
The CFO said that they are “in a solid financial position with a path to profitability” in their last quarterly conference call, but I haven’t seen any projections about when they reach the end of that path or what their revenues or gross margins are going to look like when they get there.
So in the end, to me it’s a fascinating story and a great potential revenue growth story, but it’s going to take them at least a year to really get to full capacity at their large JV facility with Bunge (Moema) and see if they can get some traction with their oil drilling lubricant, which seems to be the fastest-uptake potential among their end markets (testing food and cosmetics ingredients and rolling out new products to consumers takes a lot longer than rolling out a new industrial lubricant to a few big oil and gas drillers). The potential for their food ingredients sounds pretty fantastic, but I don’t really have any idea when it could become big enough to be profitable — the talk from the company indicates to me that they’re looking for a steady rampup in capacity and a back-and-forth with potential customers on testing the product over the next year or two, gauging the best demand markets to get the best price for their oils, and, importantly, bringing on a lot more partners to enable them to increase market share and capacity without more massive new capital projects.
Analysts are projecting that the company will dramatically increase revenue next year, largely due to Brazil I expect, going from an anticipated $75 million in revenue this year (which itself would almost double last year’s revenue) to $275 million in 2015, but at that they’re still going to be losing money at a pretty substantial rate (analysts estimate average loss per share of about 70 cents next year). So the revenue growth is expected to be there, and if that 200% growth rate can continue then they could eventually become profitable, I just can’t foresee where that pendulum swings. I like the story, I like the early success of their consumer products, and I hope this becomes a great renewable oils company — I just don’t know how much the stock should cost because I don’t understand how much money they might make, or when. So that’s not quite enough for me to jump in personally, even with the stock hitting new lows to tempt the bargain hunters, but we are close to a pretty substantial catalyst in new capacity hitting their revenue line dramatically for the first time so there is some possibility that this big expected revenue boost will appeal enough to investors to boost the share price over the next year or so — investors do, after all, always love a growth story.
If you’d like more optimism on this one, the Motley Fool folks have also been big fans for a couple years now — we’ve covered teaser campaigns that touted Solazyme in both 2012 and 2013 for their Hidden Gems service, and recent disclosures indicate they still own it (and if you’d like to understand how their commercial algae fermentation and oil production works, there was a great series of free Motley Fool articles on the infrastructure, upstream equipment and labs, fermentation and reactors, and recovery — which will, at least, help to explain the challenges of these plants and why it takes a year or more to get to “nameplate” capacity).
But that’s just me, and my failure of imagination that won’t let me get past the current financials as we look at the future potential story — it’s your money at stake, so let’s hear from you. Will Solazyme be a “game changer” that builds a strongly profitable niche in commercial algae oils? Is it worth half a billion dollars here, or a lot more or less? Let us know what you think with a comment below.
P.S. Remember that “$107,000 windfall” mentioned in the ad? That came from his look at another company that he says “conquered a narrow market and broadcasted its breakthrough discovery to the world” — Geron (GRN). He pulled out a chart showing GERN’s move of roughly 400% last year and extrapolated:
“Enough to turn a simple $1,000 investment stake into more than $5,000 and to turn $10,000 into $53,761.
“Again, that’s after only six months, meaning you’d be on pace to make more than $107,000 in a single year…”
So I hope no one is hoping that a windfall return of 400% like GERN had for that spurt is something you can extrapolate to say you’re “on pace” for 900% gains. In GERN’s case, that was followed about six months later by a 70% loss so if you held on your $10,000 stake would have been perhaps $15-20,000, depending on exactly when you bought. Geron’s about the same size and they’re both working broadly in the field of biotech, but that’s about all the similarities I can find — GERN is trying to develop drugs for breakthrough profits, Solazyme is trying to industrialize a biological process and find attractive markets for its oils. It might work out, but it would take an unbelievably huge and lucrative licensing deal for Solazyme to get a quick 400% (or 800%+ “annualized”) gain — huge enough, I’d wager, that a partner would be better off buying them than dealing with them. It hasn’t happened yet, as Solazyme has worked through toward commercialization (and seen their IPO price of $20+ dwindle to $7), but perhaps patient shareholders will be rewarded.