Clarus initiates on BIOX

If you are interested in what’s going on in the Canadian biodiesel world, Clarus Securities initiated coverage on Wellington Financial Fund III portfolio co. BIOX Corporation (BX:TSX) earlier today. Here is a snapshot of their research note:

The Flexible Feedstock Advantage

We are initiating coverage on BIOX Corporation with a BUY recommendation and a $2.50 per share target price. We believe BIOX has significant growth potential and a sustainable cost advantage based on process technology and feedstock sourcing.

Growing End Market: We believe biodiesel is entering a period of rapid, transitional growth. Government mandates should actively support biofuels in order to achieve renewable fuel standards targets. In North America, we expect implementation of mandates will increase biodiesel demand ten fold by 2012.

Patented Technology – Better Economics: BIOX’s patented technology gives it a significant cost advantage. The Company is able to process a variety of feedstocks including raw material with high free fatty acid (FFA) content. Conventional biodiesel producers operate best when processing low-FFA feedstocks including soybean or canola oil, however, pricing of these feedstocks has increased rapidly, such that many biodiesel facilities are unprofitable.

Rapid Production Growth: BIOX currently owns a 67 million liter facility, and it is fully financed to double this capacity via a new facility. The Company has undertaken significant work on four additional sites for the placement of new production. If developed, BIOX would have a total production capacity of ~335 million liters.

Strong Partnerships: The Company has secured 100% of its feedstock requirements for the Hamilton facility. BIOX has also secured off-take agreements for ~90% of its production. BIOX customers include large scale distributors, which in turn resale blended fuel in N.A and Europe.

Valuation: We arrive at our target price of $2.50 per share based on two facilities in operation and an EV/EBITDA 2012 multiple of 5.5x, discounted back to 2010 at 10%. Under our blue sky scenario, BIOX could be worth ~$8.50-$10.50 per share once BIOX’s five facilities are in operation. Key risks include: early-stage development company, feedstock availability, diesel prices volatility, shifting government mandates and new technologies entering the market.

MRM
(disclosure – our Fund III owns shares and warrants in BX)