Monday, April 2, 2007

Sunopta Breaking Out To New Highs?

After the release of a March 21st Forbes article, shares of Sunopta Inc moved to a high of $12.70, breaking the previous historical high set in May during the biofuels craze of 2006. As the article highlights, biofuel companies received significant hype following the president’s 2006 State of the Union address. As with most instances of hype, companies’ shares swelled only to be deflated once revenues and contracts fail to materialize. To name a few, shares of Xethanol (XNL) and Earth Biofuels (EBOF.OB) have fallen more than 80% from their respective highs.

There are however real players within the emerging biofuels industry. Notably Archer Daniel Midland(ADM), the largest ethanol producer in the world and VeraSun(VSE), the second largest ethanol producer in the US. More interesting though are the companies working to produce biofuels from non-traditional resources such as biomass. With corn prices edging higher due to surging demand from increased ethanol production, much attention has been placed on cellulosic ethanol, or ethanol derived from biomass such as wood chips, switch grass or corn stover.

Unlike current commercial scale facilities which uses simple sugars, cellulosic ethanol is produced from cellulose, a complex carbohydrate polymer found in plant walls. Since the bulk of plant matter is in fact cellulose the opportunity to greatly increase ethanol yields presents itself when compared to traditional corn based operations which only utilizes a portion of the plant. Biomass as a feedstock is also widely abundant and will not create a constraint by competing with the food industry.

Of the two current methods used to produce cellulosic ethanol — hydrolysis followed by fermentation of sugars, and synthesis gas fermentation (Fischer-Tropsch process), hydrolysis and fermentation with enzymes will likely emerge more viable if producers can continue to decrease costs. Novozymes and Genencor for example have reduced enzyme costs from $5.00 to about $.20 per gallon of ethanol through on going R&D funded largely by the Department of Energy.

After surveying the major cellulosic ethanol projects initiated over the past two years, I noticed one consistent player: Sunopta Inc. Sunopta's Bioprocess Group has been involved with every major development; including the US Department of Energy’s pilot facility in Nebraska, Abengoa Bioenergy’s commercial scale facility in Spain and China Resources Alcohol Corporation's pilot plant(currently the only cellulosic ethanol facility in china).

From the company website:

"Our proprietary technology is the only continuous, industrially proven process in the world that can pretreat biomass at the temperatures and pressures required for subsequent enzymatic hydrolysis for the production of fermentable sugars."

As the cellulosic ethanol story develops, I believe Sunopta will continue to draw attention as they sign contracts and finalize Abengoa's commercial scale facility later this year. With shares trading near historic highs and a short position of 7 million shares(>17% of float), a contract with another major player or updates on existing contracts could be enough of a catalyst to propel shares much higher.

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