By Kathryn Morrison
Are there substantive underlying problems with the core technology, the Biomass Fluid Catalytic Cracking Unit (BFCC), and/or related production capabilities?
Or, is there a lack of understanding between KiOR management and frustrated investors? If the latter, perhaps it is fixable.
In a nutshell, during the first quarter earnings call KiOR CEO Fred Cannon projected the plant would produce 300,000 to 500,000 gallons of fuel in the 2nd quarter from its Columbus, Mississippi plant. The recent earnings call revealed the company shipped only 75,000 gallons.
Investors reacted quickly, dumping stock at cascading prices.
How did Cannon explain the shortfall? He gave a few minor reasons, including a simple bearing problem at the feedstock facility that caused the plant to shut down, but details are missing.
Cannon overpromised and under-delivered, and with talk of borrowing more money while diluting current investors, KiOR shareholders are on edge. With a void of information, fears, lawyers and rumor rush in.
The sell-off frenzy continues despite the renewed confidence of Raymond James analyst Pavel Molchanov.
Molchanov reiterated an Outperform rating and $9 price target on KiOR, Inc. (NASDAQ: KIOR) Monday following last week’s 37% and today’s additional 8% slide.
Molchanov is calling the sell-off “an excessive, momentum-driven reaction to previously disclosed information.” He continued by reaffirming “Our fundamental thesis is intact, the business model remains valid, and we think that investors open to early-stage stories should look at the current entry point (29% of our DCF estimate) as a buying opportunity. This, of course, has always been a risky stock – hence our Venture Risk suitability rating – but in that context, our stance remains positive.”
If a primary cause of the stock’s dropping price is a lack of investor understanding, where does it come from and can it be corrected?
Cannon didn’t give details, but kept saying that the gasification is a non-issue. If the problem is the feedstock, what are the real issues there? Problems are inherent in new plants until engineers know how to develop technology to handle these variations in the feedstock. There are a few theories, including the possibility of a bad feedstock batch, or the wrong equipment on site. It could have also been an issue with bad bearings, though protecting these in a wood waste environment is a well-known technology. What they are encountering right now is a learning process, particularly learning how to identify a problem and fix it before it causes major issues.
Solving the problem may require inspection procedures, maintenance schedules and recognizing that certain steps in the process must be looked at more carefully. This doesn’t necessarily increase cost, but focuses the effort on certain key areas of production. When you are going to scale and you hit a bump in the road, a good engineer will halt everything to avoid causing further damage. This requires taking a step back, asking questions and not jumping to conclusions.
Here’s the key….in the lab, nuts and bolts are not a problem, but at scale, nuts and bolts are everything.
Investors need to remember that all industries, including oil and gas, have gone through these exact same start-up problems. Whenever you manufacture anything, it’s the problems that develop during start-up that teach you how to make the plant efficient over time.
A good example is the medical profession. When a doctor performs a procedure on a patient, he is guided by a huge body of work of past experience. In a production plant in a new industry, the whole process has to be done from scratch, because you are adding so many new variables to the equation and any one nut or bolt can cause a huge problem.
So, despite the expected growing pains of a new company, why are investors fleeing? Investors have been frequently disappointed in production and financial reports, so naturally they are skittish.
However, they seemed to reject Canon’s statement that “Nothing about the KiOR technology prevented this run from going even longer. These are the types of start-up issues we’re experiencing.”
Cannon doesn’t say we have resolved the problem and it won’t happen again. He doesn’t give a long term prognosis.
Investor confidence needs to be bolstered in order for KiOR to raise additional capital by the end of September to fund operations.
If the problems at KiOR are a lack of investor understanding rather than structural, management might be able to improve the situation.
Call an investor–press conference and explain the following:
The issue that Cannon cannot address is insider selling. Do the people “in the know” see a fundamental problem with the BFCC?
Or, have the insiders with money on the line become painfully aware that investors flee with disappointments disclosed in earnings reports?
Regardless, the modest purchase of 5,000 shares by Gary Whitlock is a positive indicator. Perhaps he realizes that the gallonage isn’t necessarily as important as the establishment of steady production, which bodes for a steady uptick in capacity until KiOR reaches its full potential of 13 million gallons annually.
So much like a marriage, investors should ask themselves—will they stick it out through the good times and the bad? If not, what would that mean for KiOR’s profits?
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