March 12 (Bloomberg) -- Solazyme Inc., which makes oil products from genetically modified algae, rose on speculation its relationship with the U.S. Defense Department will grow even as some of its raw material costs rise.
Solazyme climbed 7.4 percent to $13.89 a share at 3:06 p.m. in New York. Earlier it increased 10 percent, the most intraday since Feb. 22, the day after releasing fourth-quarter earnings. The South San Francisco, California-based firm first sold stock to the public in May 2011 at $18 a share.
The Defense Department released a report last week that highlighted “a strong interest in securing non-petroleum sources of fuel.” In the second quarter, the department will present a draft policy on alternative fuels, with further briefings planned in the fourth quarter.
“Solazyme is already a partner with the Defense Department, and they delivered 100 percent of the volumes of fuel that’s part of their Green Strike Project,” Pavel Molchanov, an analyst at Raymond James & Associates Inc. in Houston, said in an interview. “They delivered ahead of schedule, so the more resources committed to renewable fuel initiatives the better for the company.”
Solazyme has delivered about 108,000 gallons (409,000 liters) of renewable diesel and jet fuel to the Defense Department, Jonathan Wolfson, chief executive officer of Solazyme, said last month.
The company isn’t “in full scale commercial operation yet, they will be ramping up as the year progresses,” Molchanov said. “Production is very limited, these are demonstration scale shipments.”
Solazyme uses a technology to convert organic material such as algae, a plant-like organism, into biofuels and specialty chemicals. Molchanov has an outperform rating on the stock, meaning that he expects its return to exceed the average among its peers.
“Their scale up is on time and on target and we’ve seen something of a relief rally,” Molchanov said. “Investors who may not have been looking at the company are now taking a look at the stock.”
While the shares have climbed, one of the main ingredients for Solazyme’s primary feedstock may become more costly after drought in Brazil damaged sugar cane crops, trimming the harvest.
Sugar mills in Brazil’s Center South, the world’s largest producing region, will make less of the sweetener than expected after a drought in past months damaged cane crops, Paulo Roberto de Souza, chief executive officer of Copersucar, the country’s largest sugar-trading company, told reporters in Ribeirao Preto, Brazil, today.
Solazyme’s “focus on commercialization will be in South America,” Molchanov said. “They are talking with Bunge Ltd. to build a bio-fuel facility adjacent to one of Bunge’s sugar mills in Brazil.”
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