Home » NEWS » Energy » ANALYSIS — Mississippi has big money invested in KiOR's financially challenged project

ANALYSIS — Mississippi has big money invested in KiOR's financially challenged project

The eyes of the international renewable-fuels community are fixed on KiOR (NASDAQ:KIOR), a Texas-based company in which Mississippi has a large stake — specifically a $75 million interest-free loan administered by the Mississippi Development Authority. KiOR plans to build five plants in Mississippi that should convert wood chips to renewable crude through a process called pyrolysis, a feat only accomplished in test facilities.

Biofuels experts, like Sumesh Arora, director of the Strategic Biomass Solutions division of the Mississippi Technology Alliance, laud KiOR as a great fit for Mississippi, which has abundant biomass resources.

“KiOR’s first location at the port in Columbus, Miss., lends itself well to utilize the tremendous pine wood biomass resources in the state for converting into next generation biofuels. KiOR features prominently in the ‘Biofuels Digest’ index of publicly traded biofuels companies, and I believe that market forces will govern the success of this sector as we move forward,” Arora said, noting that KiOR’s CEO Fred Cannon even ranked No. 20 on this year’s list of the top 100 people in bioenergy worldwide.

But some of those looking at the company strictly from a financial standpoint are more skeptical.

Sumesh Arora

On Jan. 13, CNBC’s Stock Blog said KiOR was “bleeding cash” and investors were looking at shorting it, or making money by betting the company’s stock price will continue to fall. ”It needs upwards of $100 million more just to get its two plants going and to reach profitability, and that assumes no glitches,” the report said.

The Columbus plant appears to have already experienced at least $15 million in “glitches,” with more cost overruns expected, based on regulatory filings with the Securities and Exchange Commission. KiOR is in the site selection process for its next Mississippi plant, which is set for Newton County with an estimated cost of $460 million. The plant currently under construction on a 22-acre site at the Columbus-Lowndes County Port was originally estimated to cost $110 million, according to “Pointe Innovation,” an MTA publication. Based on KiOR’s Sept. 30, 2011, financial statements filed with the SEC, the company has already spent over $125 million on the construction of Columbus plant. The MDA says the facility is expected to be in production by third quarter of this year.

In its SEC filing, KiOR explains that it is a “development stage enterprise” and “expects to continue to incur operating losses through at least 2013 as it continues into the commercialization stage of its business. The Company’s ultimate success is dependent upon the successful transition of the Company from primarily a research and development company to an operating company. There can be no assurance that the Company’s proprietary technologies will be successful on a commercial scale, that it will be successful in funding its long-term expansion plans or that it will be able to generate sufficient revenue in the future to sustain operations.”

For the nine months ending Sept. 30, 2011, KiOR reported no revenues and realized a net loss to stockholders of $68.8 million. Although KiOR has yet to record any revenue and management expects to continue to incur losses through 2013, the company does maintain that it has the balance sheet to support its continued investments. Management noted: “We (KiOR) believe that our $152.2 million of cash and cash equivalents as of Sept., 30, 2011 and $35.6 million of remaining available borrowings as of Sept., 30, 2011, under our $75 million interest-free loan from the Mississippi Development Authority will enable us to meet our liquidity needs for the next 12 months.”

Under the MDA agreement, KiOR made a commitment to make certain investments in Mississippi by Dec. 31, 2015, including $500 million in property, plant and equipment as well as wages and direct local purchases of $85 million.

KiOR recently received a cash infusion on Jan. 27 when it announced it closed a new $75 million loan with a lender group comprised of an affiliate of Vinod Khosla and two Canadian corporations owned by certain pension fund clients of Alberta Investment Management Corporation (AIMCo).

KiOR could be overvalued, however. The company’s current market value is $1.3 billion (the sum of the outstanding common shares multiplied by the Feb. 1, 2012, NASDAQ stock price), but the company only has $242 million in stockholders’ equity. KiOR’s largest stockholders include Artis Capital Management, L.P., Frontier Capital Management Company, LLC and William Blair & Company, L.L.C. The company is part of Vinod Khosla’s Khosla Ventures portfolio.

KiOR is not a hot item on the stock market. It is thinly traded, meaning few shares are swapping hands.

Risk to Mississippi

If KiOR doesn’t work, Mississippians will be out the $75 million loaned to them by authorization of the state Legislature via a special session called by former Gov. Haley Barbour in August 2010. The plant in Columbus will be collateral, the MDA has said.

If it does work, Mississippi will be on the map for hosting a successful leader of the renewable energy world.

Investors in KiOR are feeling bullish, but green technology of this kind is backed by venture capital firms because it’s not what investors call “bankable.” The company would not be able to convince a bank to give it a loan.

According to the company’s business model, the price of oil must be $76 per barrel or more for KiOR to be profitable.

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About Amy McCullough

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