Solazyme Surges 15% in Nasdaq Debut on Alternative Fuels Bet

Solazyme Inc., the developer of oil products from genetically modified algae, jumped 15 percent in its first day of trading on increasing demand for renewable sources of fuel and specialty chemicals.

The company rose $2.71 to $20.17 in Nasdaq Stock Market trading, after being priced late last night at $18. South San Francisco, California-based Solazyme sold 10.975 million shares, raising $197.6 million, according to a regulatory filing.

The demand validates the technology used to convert organic material into biofuels and specialty chemicals, said Pavel Molchanov, an analyst for Raymond James & Associates Inc.

“The science in their process works,” Molchanov said today in a telephone interview.

A key question, he said, is whether Solazyme, or rivals that are developing similar products such as Gevo Inc., and Amyris Inc. (AMRS), can do so cost-effectively. “As we think about the risk factors that investors in these companies have to confront, it’s not a science risk. It’s how successfully can they scale up to be a large production business.”

Gevo, of Englewood, Colorado, has climbed 32 percent since its February IPO, and Emeryville, California-based Amyris has gained 83 percent since its September debut. Molchanov has “outperform” ratings on Amyris and Gevo.

Biofuels Concern

John Benemann, founder of the biofuels consulting company Benemann Associates, said the business case for producing biofuels is less certain than for selling specialty chemicals.

“The jury is still out in terms of the scale-up of these systems” for fuels production, he said yesterday in a telephone interview. “I’m very supportive of Solazyme, but it’s a fair question to ask from a fuels perspective, are we there yet? I think for other products, yes, absolutely, I think that they will do very well,” said Benemann, who studied the use of algae for making diesel fuel from 1978 to 1995 under the U.S. Energy Department’s Aquatic Species Program.

Molchanov said prices for biofuels are typically about $3 to $4 a gallon, compared to specialty chemicals which generally start at $5 and reach $20 or more for products used in cosmetics and perfumes.

Production Plans

Solazyme genetically modifies algae capable of growing in fermentation tanks without sunlight, so they will make specific carbon compounds after consuming plant-based sugars or other nutrients such as phosphorus. That differs from other companies that are developing algae that relies on photosynthesis in ponds or outdoor translucent containers.

Solazyme’s algae produce oils that can be extracted and converted into skin-care products, food supplements, fuels and chemicals. “We tailor the composition of our oils to address specific customer requirements,” the company said in its regulatory filing.

The company began producing the renewable oils in 2007 with contract manufacturing partners in California and Pennsylvania, and has begun to form partnerships and joint ventures with other companies that will contribute all or some of the capital to build manufacturing facilities.

Roquette Freres SA agreed to fully fund a venture with Solazyme to create nutritional products, according to the filing. Bunge Ltd. (BG), one of the largest sugar-cane processors in Brazil, agreed May 4 to use Solazyme’s technology at one of its mills, and set a goal of producing 100,000 metric tons of the oil a year beginning in 2013.

Solazyme said May 25 it purchased its first plant, a biorefinery in Peoria, Illinois, that will produce 2 million liters (528,000 gallons) of oil a year. The project is funded in part by a $22 million grant awarded by the Energy Department in 2009.

Solazyme is also working to expand production with Chevron Corp. (CVX), Dow Chemical Co. (DOW), Unilever Plc, and Ecopetrol SA (ECOPETL), Columbia’s largest oil company. Qantas Airlines Ltd. is evaluating Solazyme’s jet fuel, and the U.S. military has tested marine diesel and jet fuel derived from its algal oils.

To contact the reporter on this story: Andrew Herndon in San Francisco at aherndon2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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