Although the average retail investor may not be familiar with the name Aemetis (NasdaqGM: AMTX), institutional investors appear well aware that AMTX is setting the stage to make 2018 a year of milestone achievements that may be quickly accretive to the company’s revenue stream. Since March 2, 2018, AMTX stock has risen by more than 360% on high volume, closing at a price of $1.87 on Tuesday.
Savvy investors are paying attention to the operational progress taking place at AMTX and view the recent gains as just the start of a trend that may move the AMTX share price considerably higher. Here’s why.
Aemetis Completes Key India-Based Project
The share price shifted into high gear in March when AMTX announced that its India-based subsidiary, Universal Biofuels, completed construction of an advanced biodiesel pre-treatment unit to process the low-cost feedstocks provided to the plant under the BP Singapore (a subsidiary of BP – a major oil company formerly known as British Petroleum) three year supply agreement. The end product produced by Universal Biofuels converts the feedstock into low carbon, high-quality distilled biodiesel. Importantly, and also a competitive advantage, the new pre-treatment unit allows for the use of low-cost waste feedstocks that are converted into biodiesel that meets the high-quality standards set by international fuel requirements. Since the Aemetis plant is the only India company that has received California approval for biodiesel under the local regulations, the domestic and the international revenue from expanding plant production rates from 10% to 100% is expected to add more than $100 million annual revenues to Aemetis.
Not only does the newly constructed unit allow AMTX to capitalize on its three-year biodiesel supply contract BP Singapore to supply the EU and the USA, but the facility also unlocks tremendous value from its association with BP. Almost immediately, AMTX is expected to monetize its newest asset by starting production of its biodiesel product in April of this year, with shipments to BP planned for the second quarter of 2018. The market appreciated the news, sending shares up by more than 80% on the announcement on enormous trading activity that exceeded 43 million shares, or more than 843,000 times the average daily volume for the prior three months.
Investors who follow the sector understand that AMTX has just unlocked a significant revenue and earnings generating opportunity and are aware of the value of the BP supply contract that is already in place. Thus, although the stock surged in price, the current price levels may still not factor in a considerable portion of the $200 million of existing AMTX production capacity and infrastructure, nor the value that AMTX is planning to achieve later this year with further significant revenue growth.
Another Milestone Reached By Aemetis
With the India subsidiary set to generate an increase of $100 million of annual revenues, AMTX announced an additional milestone on March 22nd that will lead to more than $70 million of high margin advanced biofuels production. AMTX announced that the company had completed the key federal and state agency permitting and environmental approvals for construction of a cellulosic ethanol plant in Riverbank, California. The plant is the first phase in a series of 12 phases that each will generate about $70 million of revenue to eventually convert the 1.6 million tons of waste orchard wood and nutshells in the Central Valley into high-value cellulosic ethanol, rather than burning the wood and creating air pollution and carbon emissions. Ethanol is mandated at a 10% blend into gasoline in California, which is about 1.5 billion gallons per year. With AMTX receiving both CEQA and FONSI permitting approvals, the path is clear for the company to secure its pending $125 million USDA 9003 loan.
The company called the approvals a milestone, and for investors, the approvals eliminate a substantial portion of the risk that may have clouded the commitment for investors to take positions in the stock. The reviews and final approvals took months of time, effort and analysis by both state and federal agencies, but were a requirement for the $125 million USDA loan guarantee that provides 20-year, low-cost funding for the construction of the Aemetis cellulosic ethanol plant in California. Accordingly, the stage is set for AMTX to put into motion their proposed initiatives that will lead to monetization from its 55-year lease agreement at the Riverside location and the 20-year feedstock supply agreement for waste orchard wood and nutshells from the California Central Valley.
The stage is now set for AMTX to grow its revenue and infrastructure base to higher levels, potentially bringing the share price valuation along for the ride. There is no reason for the market cap of AMTX to remain at undervalued levels, and it may be fair to say that much of the intrinsic and fundamental value of the company is yet to be realized by investors.
Even The Competitive Landscape Benefits ATMX
From a competitive landscape perspective, AMTX sits well established and relatively immune from competitive market threats. The growing market for advanced biofuels in the US is a combination of both federal and state mandates that seek to decrease air pollution and reduce carbon emissions. The federal law provides for up to 16 billion gallons per year of cellulosic ethanol, up from less than 100 million gallons per year currently in production.
Although several public companies are in the biofuels space, it is necessary to understand that the cellulosic ethanol business plan at AMTX accounts for roughly 10% of just the California demand for renewable biofuels. By building plants to solve the air pollution and carbon emissions crisis in Central California, Aemetis plans to produce about 160 million gallons per year of cellulosic ethanol to supply the existing 1.5 billion gallon California ethanol market. While that 10% market share is expected to create about $1 billion of revenues for Aemetis each year, there is very little direct competition with the AMTX business model due to the large size of the market and the patented technology used by Aemetis to produce highly profitable advanced biofuels.
Take Neste (OTC: NTOIY $18 billion market value), for instance. They are a behemoth of a company and generate substantial profits of more than $1 billion per year. A second-generation biofuel company, Neste delivers a significant amount of renewable fuels into the California market and is a global provider of biofuels. Moreover, while Neste is substantially larger than AMTX, the two companies have combined volumes that are a small part of the global demand for biofuels but show the potential to expand rapidly and generate substantial earnings.
Two other companies, Green Plains Renewable Energy, Inc. (NasdaqGS: GPRE) and Pacific Ethanol (NasdaqCM: PEIX) are in the space, but they are both on a strategically different path from AMTX. Both Green Plains and Pacific Ethanol are commodity-based businesses with little to no proprietary technology. Green Plains focuses on corn products to produce ethanol, and Pacific is primarily a pure commodity corn ethanol production and marketing business. Although both companies are successful, neither are a competitive threat to Aemetis’ advanced technology and high margins from converting the low-cost waste material into high-value advanced biofuels.
Even Renewable Energy Group, the nation’s largest biodiesel producer, is not a direct threat to slowing the growth at AMTX. However, REGI does highlight the potential for AMTX to also develop into a billion-dollar business that will benefit from government mandates for renewable fuel purchases, receive tax and production incentives, and profit from a biodiesel market that is far from becoming oversaturated with suppliers.
Aemetis Is Expanding Rapidly
AMTX has been in business since 2006 and owns and operates facilities in the United States and India with a capacity of more than 110 million gallons of renewable fuel per year. The company-owned and operated processing plant in Keyes, California brings to market more than 60 million gallons of ethanol each year and also supplies more than 150 local dairies with distillers grain and local poultry farms with corn oil. Beyond the California ethanol plant, AMTX owns and operates a 50 million gallon per year biorefinery that produces distilled biodiesel and refined glycerin, located near the port city of Kakinada, situated on the Eastern coast of India. Thus, for those seeking undervalued and misunderstood opportunities, the growing AMTX business is worth significant consideration.
Perhaps the only issue that has held investors back up to this point was the debt load at the company. However, the senior lender has funded AMTX since the financial crisis in 2008, stepping to finance the completion of the India plant, and the purchase and upgrade of the California plant. AMTX management team has announced strategic initiatives that will significantly reduce interest rates by refinancing a substantial portion of the existing debt with low-interest rate longterm funding. AMTX has raised $35 million of 3% interest rate funding and is expected to complete an additional $50 million of EB-5 subordinated debt financing at 3% interest rate that will be used to refinance existing debt that is on the books at much higher interest rates. An important factor that is overlooked by investors is that the construction cost of AMTX assets is about $200 million, but the senior debt is less than 50% of this investment cost to build the 110 million gallons of production capacity. Aemetis was able to acquire the California plant in 2012 in primarily a stock transaction that issued 11% of Aemetis common stock in exchange for the $132 million (build cost) California plant.
Thus, if the debt had been a source of concern for investors, the refinancing of the higher-interest rate notes with 3% interest rate notes has already been partially completed, and the increased operating cash flow from the India and California plants allows AMTX the opportunity to pay down debt aggressively. Reducing interest costs can make a substantial and immediate impact on AMTX earnings.
AMTX Can Convert Waste To Dollars
The value drivers at AMTX are already in place. Positioned as a global renewable fuel and biochemicals company, AMTX is applying its expertise in industrial biotechnology to convert first-generation ethanol and biodiesel plants into advanced biorefineries utilizing agricultural waste material to produce high-value products from what is typically thought of as waste materials. The patented processes used by AMTX have a global market need as the reduction of air pollution in China and India combines with the requirements for worldwide reduction of carbon emissions and transportation fuel costs. Now, AMTX is positioned as a technological leader in converting renewable waste products into a useable fuel and is now using technologies that can harvest energy from renewable waste feedstocks.
Moreover, AMTX is a significant revenue-generating company. AMTX generated more than $143 million in revenue in 2016, and with the recent announcements from both India and California, AMTX is on track to deliver higher numbers from its focus on next-generation lower carbon biofuels, and also benefiting from the regulatory approvals cited above.
Converting waste to energy can be a very good business. In the US, for instance, the Renewable Fuel Standard requires obligated parties to blend ethanol and biodiesel in increasing quantities over the next several years. Specifically, the mandate requires that “conventional biofuels” must reduce greenhouse gas emissions by 20% compared to gasoline or diesel fuel. Additionally, the mandate requires that “advanced biofuels” from waste and other low carbon materials must reduce greenhouse gas emissions by 50%. For AMTX and its investors, these mandates create large markets for low carbon biofuels. While federal law and the increasing price of crude oil creates expanding biofuels markets, AMTX is aggressively positioning itself to take advantage of these growing and lucrative markets, putting in place the technology and capital required to expand its presence in the biorefinery sector. The plan provides considerable viability to the potential that AMTX is targeting in its multi-billion-dollar industry.
India In The News, And The News Is Great
AMTX is emerging as the largest producer of biodiesel fuels in the India market. However, investors need to consider that the India facility offers a global opportunity. As stated in the March 2018 press release, the AMTX subsidiary achieved a significant milestone as it relates to biodiesel technology commercialization. The news made AMTX one of the first companies in the world to have the ability to convert low-cost, high free fatty acid waste feedstocks into distilled clear biodiesel. The product can be sold in both the European and US markets, opening a sizable opportunity for near-term and substantial revenue growth.
Not only did AMTX complete a revolutionary process and opportunity for themselves, but at the same time, the India unit became one of the most progressive biodiesel production plants in the world. The process now in place at the India unit can convert and provide to market a variety of low-quality, high FFA feedstocks that cost less than competing biofuel feedstocks. Needless to say, this milestone brings a substantial asset to AMTX. The breakthrough is now a patent-pending process that can extract only the useful components of low-quality, low-cost feedstocks used in the production of biodiesel. AMTX is now in the enviable position of capitalizing on additional revenue generating opportunities that could potentially bring partnership opportunities forward, as well as solidify their status as a unique processor and supplier of biofuels.
California Provides More Growth Opportunity
The progressive state of California is also contributing to the success of AMTX. In addition to more than $5 million of state grants to support AMTX technology and production development, California already has regulations in place to create markets for low carbon fuels, called the Low Carbon Fuel Standard (LCFS), that bolsters Aemetis’ position as the largest biofuel production plant in California.
The LCFS premium pricing will facilitate the sale of cellulosic ethanol by Aemetis for more than $4.50 per gallon. The federal biofuels mandate D3 RIN brings in about $2.50 per gallon at current prices and allows AMTX to benefit from a federal tax credit of $1.01 per gallon for cellulose ethanol production. The California LFCS premium provides an estimated $1.20 more per gallon in revenue. Combined with the value of the ethanol fuel, the regulatory incentives for the California operation offers a host of unique advantages for AMTX. With the Aemetis cellulosic ethanol plant already holding key permits and a 20-year feedstock supply agreement, the competitive landscape for AMTX may be relatively tame in the near term as emerging companies will face years of reviews and environmental impact analysis.
The Here And Now For AMTX
AMTX was recently selected as one of the Top 50 Bioeconomy Companies in the world by Biofuels Digest. Clearly, the growing AMTX footprint is a force in the United States biofuels market. Moreover, that footprint is getting larger. During the 2013/2014 rise in the price of crude oil, AMTX generated more than $40 million of positive cash flow from its Keyes plant in California. As the price of crude oil works its way higher from a low of $27 per barrel in early 2016 to a current $65 per barrel, expectations are for AMTX to expand production and propel its market opportunity by offering cost-effective alternatives to traditional fossil fuel products. In the India market alone, this opportunity is roughly 25 billion gallons per year of diesel fuel that can be replaced by biofuel alternatives, a market that AMTX is ready to fill.
Management has established a clear vision for AMTX, and they have set out a two-year plan designed to ramp up revenues from about $150 million to a run rate of $330 million per year by migrating toward high-growth cellulosic ethanol and expanding production of distilled biodiesel, while processing and delivering refined glycerin and animal feeds as byproducts.
The market advantages for certain AMTX biofuels include the benefits that their ethanol and biodiesel products are low carbon and clean burning alternatives. Additionally, along with their production of high octane transportation fuels, each fuel is produced from renewable feedstocks. On an environmental level, AMTX’s biodiesel product reduces air pollution by 80%, is environmentally friendly and is primarily manufactured from waste oils. These attributes mitigate the regulatory risks for AMTX and provide leverage in eliminating uncertainty about delivering a contracted product due to regulatory interference.
Capital Structure And Stock Price Offer Opportunity
On the capital side of the business, AMTX has about 20 million shares outstanding and a recent market cap of approximately $42 million. The valuation appears to neglect a significant amount of near and long-term potential. Knowing that the debt is getting refinanced and repaid from operating cash flow, and that near-term milestones may provide favorable funding opportunities for the company, a valuation of less than its $200 million asset base may offer a tremendous value opportunity for investors.
Beyond the asset base and experienced management, AMTX enjoys agreements with industry giants such as BP Singapore, which can assist in facilitating enormous global opportunity in growing markets that are recognizing the importance of clean-burning, alternative fuel sources. With a worldwide economy that is gaining GDP momentum and a 140% rise in the price of WTI crude oil since 2016, the need for alternative fuels, especially from countries that mandate its use, will continue to rise for the foreseeable future. Therefore, when combining the sum of the parts of AMTX, the company is a value opportunity. When adding in the most recent accomplishments in India and California, the potential for investors to gain significant value appreciation from AMTX stock has already been clearly described by the company.
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