before he wandered off in his due time. There was a time and place when an impatient Skunk would have done something stupid and not have let Mr. Bear off so easily. (In Kornfield Kounty we didn't wait for some dudes in black gowns to tell us we had a right to bear arms.) But like my old dog has already figured out - patience is the one blessing of age.Well I see GERS stock hit an all time low this week. I look at the news and filings and saw no news. I looked at the volume and saw about average volumes. I looked at the boards mid week and I felt the doubt and could smell the sense of doom. The overall markets were down, oil was
up and with no news from the company - seeds of doubt found fertile soil. As my buddy Forrest would say: "That's all I have to say about that." Not because I have more to say - its because there is no more to say. In these two paragraphs I just covered the entire topic of why we hit a new low on this particular week. Individual stocks and entire markets move on fear and greed. The former ruled the first four days of the week.Since I just covered patience in handling Mr. Bear. (None of that was a market metaphor - or was it?) I will now move on to explain Friday. What motivates people to buy this stock at these prices? Why would we finish the week up 56% for the day on above average volumes?
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Question for the Skunk from a reader:
After you factor in the risk - what is this worth? 50 million gallons of crude corn oil per year, for 10 years that we refine and sell as biodiesel? (Short answer "$Billion")
As you can see from the latest government statistics below* the price of spot diesel is projected to average $4.32 per gallon through 2008 and 2009. We have a ten year contract to purchase the 50M gallons of crude corn oil we extract at 53% of the diesel spot price. That means we would be paying 2.29/gallon of corn oil and selling into the diesel market with a $2.03 gross profit. Diesel spot last Monday was even higher at $4.65 - but $2.00 seems a good conservative number for our margin - in fact $2 is what the Company uses in the 1st Qtr Rpt. That means that if this whole thing works out we are talking 100M gross profit a year - for the next ten years! Hmm, 100M times ten years is a BILLION dollars of gross profits just with the COES we have already contracted. Gee whiz Batman, that +55M dollar debt could change from being the raging Bull Elephant in the living room of our double wide - to being a petite conversation piece in our curio. There are lots of risk involved here. But we have reduced some important ones. First of all, we have guaranteed our feedstock supply for ten years. We do not have to compete in future markets with others who might try to corner our supply. Since we produce it, we control the quality of the feedstock. Most importantly, if the cost of our feedstock rises - we will have a higher sale price - which protects our margins. If the sale price of Diesel crashes - so does our feedstock costs. What other kind of business model (besides government) has such control over their margins? Remember the lesson last week of the rising feedstock for the Soy based biodiesel? A whole lot of Soy Biodiesel producers are losing money, or shut down because the price of their feedstock is higher than their product. They cannot control their feedstock prices. We have. Advantage GERS.
Again, all you have to do is read the message boards for a day or two and you will hear that everything but sunspots are aligning to do GERS in. Heck, all you have to do is read the Risk Factors in the Company Annual Report and you can see that there is plenty of things that actually could turn us belly-up in the rhubarb. Yet when you have a number that starts with a "B" as in "Billion" looking at us; contracted and feedstock hedged over the next ten years - well for some of us who are risk tolerant - that balances a lot of the "R" as in Risk. **
To review real risk factors - check out p.24 of the '07 annual report:
http://www.greenshift.com/pdf/GERS%2010K%202007%204-7-08.pdf
To see how the Skunk thinks this may turn GERS shareprice in FEB 2010 to almost $5** a share if all these 2009 goals are met - see my long range forecast.
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2nd Question from a reader . . .
How many COES does it take to feed the wolf and turn a profit? (Short answer 1 + 4)
Profit. That's a sweet word. In our case a true profit should cause even our cynics to reconsider. Well the Skunk printed a copy of page 7 from the 1st qtr rpt - you might want to do the same. We can break this down into 4 sections and we are first concerned with the totals of the first two. The first is "Income(loss) from operations". The second is "Other Income(expense)" The third part is just adding them together with taxes/misc. That is our all important net income or PROFIT. The last part is how those numbers affect our stock.
Starting from the top things start out good with 1.77M gross profit for the quarter. Things keep looking good as we dropped our General and Admin expenses by almost a third and our stock based compensation expense by over 80% from a year ago. We see we already have a positive Income from operations of almost half a million for the first quarter. This compared to a loss of over 3M for the same time last year.
As we get half way down the page - Other Expenses and Income add up to about a 4.2M dollar loss. Now this section includes interest on our debt - but that is only 1.3M. In fact if we eliminate both the one timers -1.67M disposal of an investment and the gain of a derivative investment +.32M (the first two things) - we get about 2.93M loss here. Since its a loss lets round up to 3M and be conservative. Don't want the shorts to say we're cutting corners!
Finally we see 7 G's go to taxes and then we slide down untouched to a net loss attributable to common shareholders (that's us) of 3,794,409 or -3.8M.
So how do we make a profit? Well we already decided we are going to have about a 3M loss a quarter or 12M a year from the second part or "Other Income (expense)" . So how do we get the "Income from Operations" in the first part from under half a million to over 3M? Well, what would it take to raise our gross profits by 3M a quarter? We know that every gallon of corn oil provides about $2 in gross profits. One COES producing at 1.5M nameplate provides 3M in Gross profits a year. Four COES producing at nameplate should provide the 12M in annual gross profits required for this company to post an actual PROFIT! That's NET INCOME.
These 1st Quarter numbers were basically produced with the Utica Plant COES producing well below capacity without NEXTdiesel providing added value to our product. We should have five COES installed, commissioned, tweaked and running up to capacity moving through the 3rd Quarter. So we could possibly be in the pink - and see a small profit as early as the third quarter - depending on many factors.
The Skunk sees that we should have all of the first five COES buzzing full time in the 4th Quarter. Just with these five COES we should see a real PROFIT. And these 5 should be joined along the way by the other three named COES being installed by 30 September and coming up to full capacity in the 4th quarter. We should also see the expanded Oil seed plant coming back in the 4th. All of this points to the Skunk that if we can dodge a few more arrows - the 4th quarter of this year could be the first of 10 years worth of profitable quarters. And ponder for a second what only a 1.5M dollar profit would mean in the 4th quarter. At even a hundred Million shares Outstanding that's 1.5 cents a share for the quarter or an annualized rate of 6 cents a share. At only ten times earnings that is a value of 60 cents a share. And that's another reason why the Skunk stands by his end of year stock price prediction of 60 cents** - almost 12 times last weeks low.
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30 June & YAGI (a/k/a the sky is falling scenario)
Words matter. In a legal document signed by lawyers - they really matter.
These are the "words" people are talking about since we are close to 30 June.
5.14 Build Out Draw Schedule. The Borrower shall install the COES Installations in accordance with, and subject to, the Build Out Draw Schedule. In addition, the Borrower shall have installed no less than four (4) COES Installations (in addition to the Utica System) on or before June 30, 2008 and no less than three (3) additional COES Installations on or before September 30, 2008.
Note that it does not say commissioned, hooked up, or in production. What it says is "have installed". Importantly "installed" is not defined in the agreement. The simple definition of install it to put in place - or "to place in position". So all we have to do is put the COES equipment on site, in position. According to the information I published some time ago, the 4th and 5th COES, at Riga MI and Lakota IA were set to receive the equipment in June - with start ups in Aug and Sept. So as long as that happened it looks we are in compliance?
install
The Concise Oxford Dictionary of English Etymology Date: 1996
(after F.) to place in position
"BUT SKUNK WHAT happens if YAGI says we are not in compliance anyway??" Well Skunkettes, I guess it all depends on who decided compliance?
So who gets to decide if we are in compliance? Well if we read the definitions of the agreement we find two interesting things. The first is Mr. Kreisler decides if we are in compliance with this portion of the agreement. The second is all it takes is two signatures - not a renegotiated agreement - to change the schedule.
Section 1.1 Definitions
"Compliance Certificate" shall mean a certificate in a form acceptable to
the Lender in all respects executed by the president or chief executive officer [Mr. Kreisler]
of the Borrower certifying to the Lender that . . . the installation of the COES Installations is proceeding in accordance with the Build Out Draw Schedule and Section 5.14 hereof,
Beyond all of this discussion - according to the agreement all it takes is two signatures on a note pad to change the dates when the COES are completed. The entire agreement does not need to be renegotiated.
"Build Out Draw Schedule . . . may be updated, modified and amended from time to time pursuant to the mutual agreement, in writing, of the Borrower and the Lender."
So again - this is serious business. Does the Skunk expect us to be in noncompliance on the 1st of July? Not if the equipment was delivered to the sites as Global Ethanol projected in the May newsletter:
"The skid mounted equipment is expected to be delivered in June with an
August start-up in Riga and a September start-up in Lakota."
PS - Why did Global Ethanol publish that the equipment was to arrive in June? No other COES instalation said when the equipment would be in place. Apparently that detail matters.
http://www.globalethanolservices.com/MGP%20NEWSLETER%202%20Quarter%202008.pdf
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TIDBIT
Not sure - but the Skunk may have stumbled on a secondary investor (or out of date information) in NEXTDiesel here:
New Horizons Worldwide, Inc. 1April 08
Arnold M. Jacob, 54, who was elected to the Company's Board of Directors in November 2007, is a principal of ATMF Realty and Equity Corporation in Bloomfield Hills, Michigan, a company that invests in real estate and business ventures. In addition to developing some five million square feet of commercial real estate, ATMF and its affiliates own interests in businesses including companies that distribute garden and seed products, manufacture ice cream making equipment, operate inner-city movie theaters, manufacture sausage for major grocery chains and publish weekly newspapers. Through an affiliate, ATMF Renewable Energy, LLC, the company has recently invested in NextDiesel™, a biodiesel producer in Adrian, Michigan.
*From the EIA (June 10th Release) Energy Information Administration – U. S. Government.
Diesel fuel retail prices in 2008 and 2009 are projected to average $4.32 per gallon, up from $2.88 per gallon last year. This reflects strength in diesel demand, particularly in emerging markets, that has significantly increased the margins between diesel prices and crude oil costs from those of last year. Diesel fuel prices are projected to remain near the June 2 price of $4.71 per gallon over the next few months as refiner margins begin to weaken slightly, offsetting the projected rise in crude oil costs.
http://www.eia.doe.gov/emeu/steo/pub/contents.html
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End of Year (EOY 2008) Forecast
The Skunk stands by his detailed EOY forecast from the blog 2 weeks ago. See that previous blog for details. My prediction for the last trade in 2008 for GERS is the center of the Trading Range .60**
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LONG RANGE FORECAST (reprinted from my last detailed review 30 May 2008) You can see that blog with easier to read font in the archives - below right.
Detailed review of the quarterly has made two BIG changes* to my forecast. The first is the increase of value added margin found in the Quarterly due to spot price increase in the price of bio-diesel. The second is the added dilution from the BIG purchase and Series "E" employee stock conversions. From the quarterly: "Moving forward, since we are now directly refining our extracted corn oil into biodiesel, the contribution of corn oil to our gross profit is expected to increase to more than $2.00 per gallon." The goal for GERS (as it has been for at least the last 8 months) is to have 50M gal of COEs, 50M gal of bio-diesel and 16 M gal of oilseed crush annualized capacity online by the end of 2009. With 50M gallons value enhanced that is over $100M EBITDA. (Up from my previous 70M estimate based on $1.40 gross profit/gallon in the Nov 2007 Shareholder Letter.) The expansion in Montana is still expected to be completed in 2008 - and a good year running near capacity in 2009 should be a solid start to paying off the $9M debt to its former owners and the service of its own debt. We are expected to add $80M in sales and $12M in EBITDA from the Montana Oilseed crush plant during the years 2009, 2010 and beyond. We see in the Feb '08 shareholder letter a mention of more than 15M in sales for the construction of four 10M gal Bio-diesel plants to third party clients. Our focus has obviously evolved away from third party sales to building our own COEs and bio-diesel. In the shareholder letter dated 9 November 2007 the total estimated future revenue from Bio-diesel sales was 53m with an EBITDA of 13M. We will use that ratio to find the EBITDA for our 2008 sales - I will then use a conservative flat projection for 2009. Our 15M then, provides a conservative $3.68M EBITDA for our annualized third party sales projected into the future. Totaling up our three major revenue sources in blue font above, we have a projected annualized rate of EBITDA in Feb 2010 of $115.68M If we reach these goals - clearly re-stated in the 2007 Annual Report - and the First Quarter Report - then it will also affect the number of shares outstanding. A detailed employee stock reward program is in effect on page 93 of the 2007 Annual report. Put simply - with well over $100M EBITDA - the outstanding shares will be 290,132,290 (241,133,851 in Annual) - nearly 3.5 times its present number of 85,031,348. Since we want to include all possible dilution to find a conservative number - we also need to look at page 59 of the annual report to learn this: "Potential future dilutive securities include 996,279 outstanding options and warrants, and 37,865,871 shares issuable for the conversion of convertible debentures." Which now changes to this on page 13 of the Updated Quarterly: "Potential future dilutive securities include 996,279 outstanding options and warrants, and 37,865,871 shares issuable for the conversion of convertible debentures and 56,300,942 shares issuable after the conversion of the Series B Preferred stock under the employee pool." So with the employee stock reward program and these remaining convertible debentures all paid through dilution - we get a grand total of 388,295,382 shares "possible" outstanding in FEB 2010. Or, with your permission, the Skunk will round up to 388.3M Shares Outstanding. This is where we may stand with the OS shares - some 4.6 times the present levels in under two years. Yet, what shareholders need to remember is in order to have that kind of number of OS shares - the EBITDA will be over 31 times its present amount ($920,324 X 4 = $3,681,296 or 1st Q at annualized rate of 3.68M) and that difference will be reflected in the share price. Using a factor of one-third to project net income from EBITDA , we can see: 34.7M/388.3M Shares = (net income)/Total OS) = .08936 (PE) X (Diluted EPS) = (est PPS) 55 x .08936 = $4.91 Share Price in FEB 2010**
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**Note: I am a shareholder - I do not work for, nor do I receive any direct or indirect payment from GERS or anyone associated with them. (But it would be Kapitalist Kool if I did) I will not intentionally mislead - but I can be wrong (ask Mrs. Skunk for specific frequencies) - so do your own due diligence - and take responsibility for your own financial decisions – (and your own life in general) good or bad. And some good garage logic luck to ya.
PS. Flash didn't work so that picture of a black bear is not my bear - its a tad small - but the right markings and color - it also had a nice brown muzzle.
Skunk
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