CymorFund Stock Pick – EcoSynthetix Inc (TSX-ECO $3.18)
EcoSynthetix Inc
This is a company that went public in 2011 with great promise. A common product used extensively in many of today’s manufacturing process is “Polymers”. Polymers are used in everything from putting covers on printed materials to making cosmetics. I have listed below some of the more common uses. Like so much else in our modern world, crude oil plays a major part in the production of polymers and large amounts of crude oil are diverted annually to this production.
As the price of crude oil rose from the $20 range in the 1970’s to today’s $100+ price, the cost of producing these polymers rose accordingly. You might think that driving vehicles is the major usage of crude oil, but polymers are a prime example of the hidden uses of great quantities of crude oil.
Along came EcoSynthetix Inc which promised to eliminate the use of crude oil in the manufacturing of polymers. Instead a new and great GREEN technology would use simple corn and potatoes instead of crude oil as the feedstock. Now when the use of corn to produce ethanol as an additive to our gas tanks became law, everyone thought that this diversion of corn from feed stock and food to energy would produce a spike in the price of corn.
That didn’t happen and corn is now trading even lower in price than it has been in the past. It therefore seems that the supply of feedstocks from our crops to these alternate uses does not create enough of a supply issue to affect price or supply.
JUMP ON THE BANDWAGON
Well, as with every new and great advance, the investing world thought this was enough of a disruptive technology that they valued the company at $9.00 a share in the IPO in 2011. Really an over optimistic view since the company was nowhere near producing and selling enough product to make a profit. After all, companies are in business to make profit – aren’t they?
Sometimes I wonder how the insiders and the people ‘in the know’ can buy new IPO stock after new IPO stock and see their investments slide in value, and still jump on every new bandwagon.
The Stock Price of ECO
After the IPO, the stock started its downward slide in value reaching a low in February 2013 of $2.66. What a crushing blow to the IPO buyers at $9.00. Of course the brokers were happy. They got paid their commissions based on a $9.00 value and that was their prime concern.
Then in March 2013, the stock started rising as the company started making inroads. It rose to $5.50 in value by mid July 2013 as word got out that the company might actually succeed. But the market is finicky and the stock started to slide again. The believers who had re-entered the story again got crushed as the stock slid to $3.20.
Buy When There is Blood in the Streets
An old Baron Rothschild saying, which has been repeated many times since in slightly different wording. In my recent blog on Innergex, I quoted two sayings of Warren Buffett to the same effect.
The time to buy ECO is now. They have gone through their teething pains. They have established real markets. They are indeed becoming a disruptive technology, and they are poised for success. The stock is very cheap now and the real value is certainly there.
Some Background
EcoSynthetix created a system to produce polymers from natural crops such as corn and potatoes. Most polymers are produced from crude oil. The cost advantage of producing polymers from corn or potatoes is enormous as corn currently sells for $4.76 per bushel on world markets and is available worldwide. It takes 3 bushels to produce 100 lbs of polymer.
Most polymers today are produced by existing technology from crude oil. It takes one barrel of crude oil at today’s world price of $105 to produce the same one hundred pounds of polymer.
It is obviously more beneficial to use corn rather than crude oil. The other issue is availability as corn is available everywhere but crude oil was be transported from wherever it is found. The company claims that its process will be less costly than producing polymers from crude oil until crude oil drops in price to $20.00 per barrel, which is most unlikely in the near future
What Are Polymers?
Polymers are used everywhere. They are used in industrial manufacturing including packaging, paints and coatings, insulation, adhesives, printer ink, coated paper, personal care products, carpet backing, building materials, and some clothing.
There is a $75,000,000,000 market for polymers which is mainly served by the petrochemical industry – in other words crude oil.
How Does EcoSynthetix Do It?
EcoSynthetix low cost production of polymers is a disruptive technology to the existing market. The company claims that it uses a “twin screw intrusion” process which is a continuous process. Most competitors use a batch process where each batch must be completed before a new batch is started. The company claims this process is protected and patented. The cost of production using this process is approximately 8¢ per pound.
Another advantage that the company claims is that the CAPEX of creating plants to produce this polymer, which they say is approximately $4 million per plant and the plants are scaleable. They claim each plant can produce $100,000,000 in annual revenues.
The company claims that it is taken 15 years of research and development to reach this stage but it is now on the verge of massive success.They now have 70 people employed with plants in 12 countries and 30 customers worldwide. They use a warehouse system whereby warehouses are established around the world and therefore product can be delivered quickly and efficiently to any customer
What is on the Horizon
The company has a new product where it uses cane sugar to produce polymers for the paper, cardboard and particleboard industry which it claims is an enormous market. The company claims that samples have been delivered to potential buyers in various countries and that the tests so far are very positive. They are very optimistic as to a massive increase in worldwide sales.
There are worldwide prohibitions coming into place to eliminate the use of formaldehyde resins, so that over the next five years the use of formaldehyde will cease. This company produces a sustainable alternative to formaldehyde resin.
Profits (Losses) to Date
To date the company’s revenues are modest and profits are non-existent. They claim that the cost of expanding worldwide has eaten up all of the profits, but say they would be immediately profitable should this expansion cease. They have a cash balance of $85,000,000 with no debt. The company appears poiseds to become a very profitable enterprise.
Financials
The company has 62,000,000 shares outstanding with a market cap of $225,000,000. It went public in May 2011 at $9.00 and then started a relentless decline in price reaching a low in February 2013 of $2.64. The markets saw only losses from this company and obviously were skeptical about the possible success.
This is another of those stories where you buy when the market advantage is there. This stock has unlimited potential and is a green technology stock.
RISKS
As always, when a production facility is being built and operations are being expanded, there is a risk of unsuccessful implementation of what is expected. The fact remains that it takes one skill set to invent a process, and another to profitably implement facilities to make profit.
Summary
The market valued this IPO at $9 per share. All of the fundamentals that existed then, still exist, except that the project has advanced substantially further. The market weakness has provided a buying opportunity.
CymorFund Stock Picks – Buy EcoSynthetix Inc (TSX- ECO $3.18)
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Views expressed are opinions and not investment advice. You should retain a licensed professional to guide you and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.
