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Ethanol
Makes Sense When Done the Stratos Way |
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The
idea of ethanol is wonderful, and it could be quite a profitable
venture - at least here in the United States - if the industry wasn't
doing things the hard, ineffective, or fiscally unsound way. Good news
though ... ethanol can be done 'right'. You just might have to
go overseas to find a company that can potentially do it better and cheaper
(even when adding in the cost to deliver their ethanol to the United
States).
 How
can an organization do what nobody else here in the U.S. seems to
be able to do? Simple. Outside the U.S., subsidies aren't misdirected.
In this company's home country, the United States' import tariffs aren't
through the roof. More importantly, this company plans to create ethanol
not using corn, but sugarcane.
Sugarcane ethanol's
energy input/output efficiency is almost six times that of corn
ethanol's input/output. The problem is, the U.S. ethanol industry just
won't let go of using corn as the base product. That's fine, but it's also
inevitable that another company will eventually supply the same ethanol
at a better price.
Well, we've
found the company that may be on the verge of doing just that.
The name of
the company is Stratos Renewables Corporation (OTCBB: SRNW). After
a great deal of due diligence from our analytical staff, we believe Stratos
could potentially be one of the top ethanol-producing opportunities available
to investors. The details speak for themselves.
Stratos Renewables
Corporation is a development-stage sugarcane ethanol producer. Based
in Peru, the climate as well as free trade agreements with
potential customers means Stratos has the potential to produce more ethanol
energy from an 'input' point of view, and sell that ethanol at a considerably
lower price than current producers can.
 All
told, Stratos has a very long-term lease on 24,000 hectares of farmland
in Peru ... about 60,000 acres. That much land is capable of producing
up to 90 million gallons of ethanol per year. At a current price-per-gallon
of around $1.70 per gallon, Stratos should eventually generate revenue
of around $150 million. There's even a possibility another 24,000 hectares
could be leased in the future, thus doubling the potential.
The market is
certainly big enough to support that much ethanol consumption too. The
United States alone consumes more than 6 billion gallons of ethanol per
year, and the number is expected to exceed 7 billion by the end of 2012.
Global consumption could exceed 12 billion annually by the same year.
There are three
key reasons why Stratos expects to be a highly-competitive entity in the
ethanol market ... geography, logistics/costs, and free trade.
 Though
the country of Brazil has had great success with sugarcane ethanol (as
opposed to the United States barely being able to make corn ethanol viable),
Peru may well be the ideal geographical location to even outdo Brazil's
success.
While the central
and eastern part of South America are good environments to grow sugarcane,
a challenging rainy season means Brazilians can really only grow sugarcane
about six months out of the year. On the western side of the continent
- however - there is no rainy season ... it's pretty dry all
year-round. Therefore, cane can be grown all the time. Since
more sugarcane means more ethanol, Stratos plants could create more product
to sell on an acre-for-acre basis. All told, Peru's land can grow 144 tons
of sugarcane per hectare every year, while Brazil's can only produce 90
tons per hectare.
The second
reason
Stratos would be an attractive investment is advantageous logistics. They
are not just an ethanol still. They grow the cane themselves that's
used to make ethanol, which allows them to control input costs (sugarcane
is normally about 70% of the total ethanol expense). Each of their
planned stills will be located near their farmland, so delivery of the
cane won't be a challenge or financial burden.
And, the 24,000
hectares or farmland is all located less than 50 miles away from the seaport
(Eton Port) they'd be using to deliver the ethanol once it was made. Other
ethanol plants have to transport their product much further than that just
to get it on a boat.
Between the
savings on transportation costs and the cane purchase costs (since they
grow their own), Stratos can create and ship a gallon of ethanol for
about $1.00. It costs 85 cents to create it, and about 15 cents to
ship it to its final destination. For comparison, it costs about $1.15
to make ethanol Brazil, which doesn't count transportation costs. It costs
about $1.70 to create a gallon of ethanol for most U.S. producers. Needless
to say, there's a clear pricing advantage.
The third
and final major advantage Stratos potentially has on its competition is
a strong and open free trade agreement with the United States ... an agreement
the U.S. does not have with Brazil.
As it stands
right now, not only does Brazilian ethanol cost more to produce, but the
U.S. tariff of 54 cents per gallon for Brazilian ethanol makes it cost
prohibitive to ship ethanol from there to here - they can't sell it
at a competitive price and still make money. Since import duty doesn't
apply
to Peru's ethanol, it's economically sound to sell and send it to the United
States - the world's biggest consumer of ethanol.
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The
Math of the Ethanol Industry |
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It's not just
pricing and a lack import duty that should make Stratos a major ethanol
supplier in the near future. The science behind the production is the reason
this company's ethanol could make good fiscal - and environmental
- sense.
 There's
really very little net energy gained when corn is converted to ethanol.
For every 1.0 unit of energy used to great corn ethanol, only 1.2 energy
units are created. When sugarcane is made into ethanol though, for every
1.0 unit of energy used in the process, 8.0 units of energy are generated.
Best of all, a key food resource like corn isn't unnecessarily wasted.
All well and
good, but we're still more concerned about the investment point of view
than the scientific point of view.
In the prior
section we mentioned the cost to produce a gallon of ethanol in the United
States is about $1.70. That amount is a surprisingly strong floor, not
entirely because of, but largely because of the government's
ethanol subsidy program.
The math behind
the cost and price of ethanol made here in the United States is complicated,
not to mention always changing. Here's a simple explanation...
There are three
distinct entities involved in the process - the farmers who grow
the corn, the producers who convert the corn to ethanol, and the
distributors
who sell the ethanol.
The farmers
growing the corn are making some money in the process. Fortunately
for them the price of corn is relatively strong, even though it fluctuates.
They can usually cover their costs. The distributors don't actually generate
any amount of net margin between their cost and their selling price, but
they keep the 51 cent-per-gallon 'blender credit' ... the subsidy that
makes ethanol such an attractive business to be in. The middle men
in the process - the producers - aren't actually making much if
any money by producing ethanol. It costs about $1.70 to make and deliver
a gallon of ethanol (between corn and production costs), but it can only
be sold to distributors for about the same price they're selling it.
Now, as the
price of oil and the price of ethanol moves higher or lower, the profitability
of ethanol - or lack of - can also change a little. For the most
part though, the profitability to blenders - and everyone else -
stays about the same.
The point is,
as long as the subsidies exist, and since input costs like corn do have
a minimum price - and as long as the producers won't sell ethanol for
less than their cost - the price of ethanol just isn't likely to move
lower anytime soon. As such, a foreign entity that can create it for
about 40% less than the average cost to produce it domestically should
be able to find a strong market for a long time.
Stratos Renewables
Corporation intends to begin bearing revenue through ethanol production
in the 2nd quarter of 2009. With the current land and facilities, Stratos
expects to generate about $15 million in quarterly revenue by selling approximately
9 million gallons of ethanol every three months. With a sales price of
$1.70 and a cost of only $1.00 though, quarterly profits could be well
over $6 million at that pace.
Further into
2009, the second 24,000 hectares are anticipated to be seeded, with another
facility being built that could generate up to an additional 45 million
gallons of ethanol per year. Beyond that, Stratos has found even more suitable
land that could be utilized, and by the end of 2013 intends to add three
more stills in addition to the ones already mentioned.
All told, the
company could be able to produce 180 million or more gallons of ethanol
per year within five years. At current prices, that translates into revenues
of roughly $300 million, and profits of more than $120 million per year.
Relative to
the current market cap of $50 million, the Stratos opportunity appears
to offer highly favorable risk/reward ratio. We believe long-term investors
could see their shares greatly appreciate in value as the company begins
and increases production.
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Updated: 9:18 am PST (17:18 GMT), January 5, 2009
