Biomass Expected Returns:

The Capital Asset Pricing Model

Larry Sullivan, Project Management Consultant

Adjunct Professor, The Citadel

Economic Geography

Trident Technical College

Lawrence D. Sullivan & Company, Inc.

Carla M. Wood, Ph.D.

Advanced Bioeconomy Feedstocks Conference

Royal Sonesta Hotel, Vieux Carré

New Orleans, Louisiana

June 9-10, 2015

It is a challenge to visit NO and see my childhood home from

the late 1950s to the early 1960s on London Canal where

levee breached. This is 2007, two years after Katrina.

Lawrence D. Sullivan – Past & Present

20 Years in Oil & Gas (Dresser, Imperial

Chemical Industries & Conoco/Dupont)

as Petroleum Engineer and Manager

Last 13 Years in Biofuels, Biomass,

Biochemicals - Early Stage Firms

15 Years Living and Working Outside

the USA – SEAsia, Middle East, EU &

Africa

Speaker at 35 Conferences –Beginning

at 2004 Biotechnica America on

Biofuels

Advisor to Gerson Lehrman Clients

Top 2% Expert since 2004

Due Diligence for GLG Clients

Turner, Mason & Company - Oil

Refiner Acquisitions of Biofuel

Assets in 2008 and 2009

Expert Witness

Adjunct Faculty at Trident Technical

College and Adjunct Professor at

The Citadel

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Carla M. Wood, Ph.D.

Academic Career

B.S., The Evergreen State College -

Biochemistry

Ph.D., Texas A&M University –

Biochemistry & Cell Biology

Post Doctorate, Baylor College of

Medicine, Depts. of Cell Biology – Human

DNA Repair, Cellular Transformation &

Mutagenesis

Staff Scientist, NIH, National Institute on

Aging, Molecular Genetics – Genes of

Senescence, Stress Response, & DNA

Damage

Research Assistant Professor, University of

Minnesota – 1) Expression Analysis of Non-

Receptor Protein Tyrosine Kinases in

Childhood Leukemia 2) Biomarkers in

Multiple Myeloma

Patent Law Technical Advisor, Merchant &

Gould, LLC, Minneapolis & Seattle

Consulting Career

Consultant at L. D. Sullivan & Co.

Since 2004 (Owner Since 1998)

Advisor to Gerson Lehrman

Group Clients - Top 2% Experts

Due Diligence for GLG Clients

Expert Witness Biotechnology

Cases

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Outline of Presentation – Themes

1. What is the Capital Asset Pricing Model (CAPM) and who uses it?

2. Return on Capital Employed (ROCE) on investments in raw materials

production (e.g., Extraction, Forestry, Agriculture, etc.) with focus on

the “arm’s length transactions” between owner of biomass and buyers

of biomass.

3. ROCE on the Basic Chemicals (generally has “mining” components)

4. ROCE on the conversion of raw materials to petrochemical

intermediates (and Basic Chemicals as well as Seven Building Blocks)

5. Capital Investment Expectations and Conclusions

References and Sources:

www.bizstats.com

Measuring and Addressing Investment Risk in the Second-Generation

Biofuels Industry. ICCT. December 2013. www.theicct.org

NexantThinking™ “Next Generation Biofeedstocks: Resources for

Renewables” www.Nexant.com Addresses raw materials

Luxresearch, http://web.luxresearchinc.com/download-webinar-

alternative-fuels-9_23_14

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General Concepts for Presentation – Terms Defined

Private Enterprise without state ownership is foundation in US although government is the single largest landowner and hence biomass owner. And, Crown Lands in Canada is noted. Private Land is the Exception, not rule of our world

Tax Credits (income versus excise) – no income, no credit!

Crop Insurance and Forestry?

Export Import Bank – oil subsidy and incentives for oil (issues of depletion compared to renewables)

Basic Land Value or BLV

“Arm’s Length Transactions”

Lifestyle Ranching & Farming Decisions

Forestry versus Agriculture and the BCAP Program

Bone Dry Metric Tonne (2,205 pounds)

Real Estate Investment Trusts (REIT) - Forestry

Master Limited Partnerships (MLP) – O&G

Farm gate, FOB, ex-works, C&F, CIF, etc. Or, what is the price laid on the side of the road?

What is “Economic Rent” and why few talk about it in public?

CAPM shows early or pre-mature IPOs challenged the investors and resulted in excessive ROI expectations

Beta in the CAPM

Cases with KIOR, GEVO, SYNM, CERE, AMRS, etc.

GEVO should be compared to PEIX and GPRE as they use corn as feedstocks.

Capital Asset Pricing Model

Return on Capital Employed (ROCE)

Formula: Terms:

Return on Capital Employed (both equity and debt) or Equity or Debt

Beta of 1.0 moves with markets

Market Return is set by Investors

Risk Free example is United Kingdom Perpetual Bonds

ICCT reports that Beta on public biotech requires high ROCE for investment

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Oil and Gas Extraction (2011)

High Risk, High Rewards

Return on Sales 38.56%

Return on Assets 20.53%

Return on Net Worth 29.28%

Quick Ratio 1.62

Current Ratio 2.28

Inventory Turnover 13.86

Note: Oil prices in 2011 averaged $111/bbl (WTI - Cushing, OK) and natural gas was $3.98 per 1,000,000 cubic feet (Henry Hub, LA).

Data for typical $25-50 million asset class independent oil exploration firm.

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Farmers and Real Estate Investment Trusts

(REITs)

The DOE Billion Ton Study and Update relative to landowners does not

look at expected return on Bare Land Value (BLV).

Generally landowner and REIT are passive. They own land the resources

under it or on it. Sometimes they retain ownership and lease for value

added but are not active in the value chain as Pulp & Paper went

offshore and/or exited (MWV, IP, etc.)

Landowners – technology firm with genetics or equipment to convert

cellulose to sugars – conversion company to make cellulose into biofuels,

biochemicals or power – who is whom?

Levi Strauss was quoted to be “mining the miners….”

Extraction Industries: Agriculture

and Forestry (2011)

Return on Sales Ag 17.81% Forestry 3.14%

Return on Assets Ag 28.42% Forestry 20.62%

Return on Net Worth Ag 72.02% Forestry 137.39%

Quick Ratio Ag 0.8 Forestry 0.48

Current Ratio Ag 1.11 Forestry 0.5

Inventory Turnover Ag 4.53 Forestry 88.26

Notes: LLC, Inc., (no MLPs) with Net Assets from $1000 – 500,000 which would include farmer-

owned cooperative societies, cattle ranchers, independent forestry owners and small time

miners. Does not cover processors like ADM, Cargill, Bunge or REITs in forestry, agriculture and

mining like Plum Creek or Hancock.

65% of SE USA Forestry is “ma and pa” or small time land owners or “Sole Proprietors” who

make at 10.86% “net profit….”

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Early stage producers are naïve about the

real costs of cellulosic biomass according

to luxresearch

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

1 2 3 4 5

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d f

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dst

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/dry

MT

EstimatedPrice

Average

Lab Concept Development Introduction Scale

Company Maturity

Gartner’s Time Lines compared to the

Typical S Curve

Basic Chemicals and/or Mining (2011)

Return on Sales 5.26%

Return on Assets 10.80%

Return on Net Worth 21.25%

Quick Ratio 1.04

Current Ratio 1.78

Inventory Turnover 13.03

Notes: Covers Bizstats data for both the chloro-alkali industry (NaCl, NaOH, Na, Cl,

soda ash, bicarbonate, NaO) and the sulfur (H2SO4) from both synthetic to mining.

Not petrochemicals or TiO2. To a degree this can be considered an extractive

industry. Asset class is $100 to 500 million.

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Petroleum Refining (2011)

Return on Sales 24.46%

Return on Assets 31.02%

Return on Net Worth 46.33%

Quick Ratio 2.96

Current Ratio 3.93

Inventory Turnover 8.69

Notes: Covers Bizstats data for both independent refiners (e.g., Tesoro, Valero)

and integrated oil & gas production companies who own refinery assets (e.g.,

Shell, ExxonMobil, Total, BP). It does not cover NYSE traded part State Owned

Enterprises (SOE) of China, Brazil, Norway. The typical refinery in this class is

$25 - 500 million in asset class.

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Conversion of Olefins

to Petrochemical Plastics (2011)

Return on Sales 6.04%

Return on Assets 8.72%

Return on Net Worth 18.47%

Quick Ratio 1.08

Current Ratio 1.97

Inventory Turnover 6.36

Notes: this includes Bizstats heading “resins, synthetic rubber, and fibers &

filaments” for example polypropylene, not propylene, or PET resin, not

para-xylene, ethylene glycol or dimethyl terephthalate. Asset Class here is

$100 – 250 million. Cargill Natureworks PLA Plastics could be in this class.

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Why Make Biofuels? US Fuel Projections

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What is Corn (Maize) Ethanol All About?

Missouri is “The Show Me State” 2011Source: University of Missouri - http://agebb.missouri.edu/

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Corn Ethanol – Follow the Money

Higher Yields, Better Basis and Farm Incomes Up

US Farm Policy is a Success

Bushels Per Acre Farm Income in Millions

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As Corn (maize) Producers have Done Well

so have the Petroleum (Oil) Producers – However,

natural gas producers need to export(note “nominal” US$ per million btu)

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Fundamental Economics - Petrochemicals

If integrated to large refinery complex (BASF, Shell, ExxonMobil, Saudi

Aramco, etc.), then petrochemicals are world class cost basis. In

biomass it appears algae could be the only integrated pursuit.

If a stand-alone facility, then purchasing of the key intermediates

could be disadvantaged depending upon locations in the world.

Historic fuels/refinery ROI over 40 years averages 9.6%

Historic standalone petrochemicals are 16.7% - however it is 5 - 7% the

size of the fuel markets with few producers and buyers.

Most integrated refinery and petrochemical plants have ROI between

the two above since locations can widely for returns. And there are

many national petrochemical firms like Sabic which operate outside

these parameters.

Source – www.bizstats.com and 35 years in oil and gas, petrochemicals.

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Conclusions

Financial analysts use a variety of tools to evaluate biofuel,

biomass, algae, biochemical, etc. investments today.

CAPM is a common tool for equity analysts.

Historic data and benchmarks such as Bizstats allow analysts to

advise fund mangers. Transparency is the key term!

To Review – ROCE (Net Equity and Debt):

Oil and Gas Extraction 29.53%

Cooperative Agriculture and Forestry 72.02% and 137.39%

Basic Chemicals 21.25%

Petroleum Refining 46.33%

Conversion to Petrochemicals 18.47%

Advanced Biofuels needs to demonstrate over 20% ROCE to attract

capital against these benchmarks using existing IPO Beta and CAPM.

Conclusions of Lux and ICCT work. Thanks to them for insights.

Thank you for your time and attention to our presentation.

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