Post Labor - Birth of a Biodiesel Giant

We split the "Labor Day" three day weekend with two days for the books. Both Friday and Tuesday saw trades as low as .025/share and volume above 500K. It can be noted that a few days later, we closed Friday the 5th 56% off that bottom. Smok'em if you got 'em* - but it must be noted it's way too early to start handing out cigars! Yet, hopefully this last "Labor Day" will be seen as the event when we painfully gave birth to the upward cycle of this stock - the day the corn oil broke - the birth of a new American Energy Company - the start of a Biodiesel Giant.

EOY FORECAST

"We are operating three corn oil extraction facilities today and our current construction schedule calls for the installation of at least another four facilities prior to year end, and another five extraction facilities and a 10 million gallon per year expansion to our biodiesel refinery during the first quarter 2009. We consequently expect to be producing the annualized equivalent of at least 10 million gallons per year of corn oil derived biodiesel by the end of the year and at least 18 million gallons by the end of the first quarter 2009."

The Skunk has previously made an EOY prediction based on the original GERS goal of 15mmgy of corn oil produced by years end. With the release of the 2Q, our production sights have been lowered for the EOY - causing my estimates to be lowered. With the new information of the 2Q in hand, I will attempt to refine my prediction of 60 cents/share (.45-.75 trading range.) As GERS nears profitability more tools become available to estimate fair market value.

"We are focused on the elimination of our net losses and transitioning to profitability by the end of this year. We plan to achieve this goal by commissioning at least seven corn oil extraction facilities on or before December 31, 2008. Combined, seven corn oil extraction facilities will produce more than 10 million gallons per year of corn oil. At current market prices, extracting and refining 10 million gallons per year of corn oil into biodiesel will produce about $1.40 per gallon, or about $14,000,000 per year, in operating income and greater than break-even profitability."

Just taking into account the COES, we see that we are planning to produce at or above the capacity of our Adrian biodiesel plant by the end of the year. GERS has estimated that we will be making 10mmgy, (10.5mmgy capacity) of corn oil derived biodiesel by EOY. If we have access to significant new financing - we could see both Albiob, MI - "probable" and Milton, WI - "possible". In that scenario we would see the possibility of up to 13.5mmgy production /capacity by the end of year - In any case lets look at the various possibilities. With 10mmgy of production, at $1.40 of operating income/gallon, we see $14M of Operating Revenue. GERS needs less than 13M of operating income to be profitable. So at $1M Profit on an annualized basis - that is 1.2 cents per share. At the optimistic top end - 13.5mmgy or $4.9M profit/year that would be about 5.9 cents/share. The Skunk says that the average P/E across the board is 15. (These indices: DIA, SPY, VTI, are now 12.08, 13.43, 13.7 P/E, respectively in this low market.) Lower for value stocks. Higher for Growth Stocks. GERS is a Growth Stock.

Once profitable and rediscovered, with its hedged feedstocks, huge order backlogs and 10 year contracts, and I suspect GERS by EOY 2009 will not trade below a 30 P/E ratio - likely higher. In the meantime, lets use a more conservative 20 P/E ratio for our figures. In this case we see an EOY price per share of about 24 cents (1.2 x 20 = .24) for just the COES/Biodiesel portion of the mix. With a close on a significant financing deal, I can see the possibility of the two extra plants coming up and closing the year producing at 5.9 cents/share. This should add significantly to the share price - possibly moving a fair market price to the 60 cent** range. (5.9 x 20 = 1.18).

Due to the revenue transformation of this company before our eyes, this company does not get its revenues where it did even 12 months ago - and I suspect revenues will have increased substantially 12 months from now. Therefore these price estimates are not based on the ttm (trailing twelve months) or the projected earnings from the next twelve months - but rather a production rate a specific instant in the future - namely the End of Year (EOY).

We are not to expect much from technology and equipment sales for the rest of the year. They have completed most of the contracted work and as long as feedstock prices remain high, non-corn oil biodiesel operations have slowed or stopped building new plants. They do have high margins, however, so anything they do should help the bottom line. Sustainable Systems will produce at historical levels and over the last six months (excluding other income [expense] taken care of by the COES in our senario) they basically broke even (-$599 2Q p. 23 ). They need the expansion to be completed before they become a force through economies of scale.

By the end of the 1Q '09, (In about seven months) we could have 12 COES producing corn oil, with all the upgrades, at or above capacity. GERS says it needs (less than) 13M/year to pay the bills. 12 COES should produce close to 18M gallons of corn oil. At 1.40/gallon of operating income (2Q p.33 ) produced per gallon, that is 25.2M/year in operating income. Minus the 13M to pay the bills - that is $12.2M of Operating Income. Lets subtract $2.25M of that to service the additional $11.25M loan required to finance those 5 new COES units. (Based on 20% interest and $1.50 capitalization/gallon capacity.) That lets us slide down $9.95M into Net Income on an annualized basis. At our present Shares OS that is an annual earnings per share of 12 cents. Just counting the COES to Biodiesel, with a P/E of 20 - that could give us a fair market value of 12 x 20 = $2.40**/share - production going into the 2Q '09.

The REST of 09?
"After the 10 million gallons of corn oil noted above, our contracted backlog corresponds to in excess of an additional 28 million gallons per year of corn oil extraction. Moreover, we have seen increased activity in our sales pipelines for additional corn oil extraction contracts and we plan to add significantly to our backlog during 2008 and 2009."

Summary

The Skunk thinks we could see 24 cents** a share on December 31st of this year. A trading range of 18 - 30 cents. This is about 10 times the 52 week low we saw on 2 Sept. We have 4.5mmgy capacity today. We should have over 10mmgy by years end. We may have 18mmgy by the end of 1Q '09 and 38mmgy by 4Q '09. Not to sound like a broken record, but most of this will only happen if we get two things.

The first of which is financing. From the 2Q:

"We must complete additional financing to achieve all of the above goals on the stated time frames." and

"We are currently evaluating offers for significant new equity and debt financing to accelerate the completion of our contracted corn oil extraction, biodiesel production and oilseed crush projects. We expect to complete additional financing for this purpose during the third quarter 2008."

A signed financing deal will provide great comfort to investors. ($5M-25M) The Skunk believes a large financing deal ($30M or more) on acceptable terms would immediately propel this stock significantly higher.

The second of which is production:

The Skunk believes outfitted COES are capable of turning out 3 gallons/minute. Will they stand up to the task and produce at this capacity over an entire month and then a quarter? The Skunk believes they can do this as well - but along with many others is waiting to see the results. The Utica plant should be producing at capacity right now. Production numbers at or above capacity over a month or quarterly period will provide great comfort and confidence to investors.

*"Smok'em if you got em." - Please don't. Nothing was smoked in the creation of this blog. In fact - this Skunk is a smoke free blogger. (I got the shocking, radical pictures off the net.)

Skunk

**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. I have been rightfully accused of being a rather cheery, positive individual who laughs at every opportunity. These tendencies may cause me to overlook deficiencies in this stock that are painfully obvious to others. Celebrate today - and some good garage logic luck to ya.