Clarus research on Biox

The passage of some pending tax legislation in the U.S. means good news for the folks over at Biox (BX:TSX), operator of Canada’s largest and coolest biodiesel plant (and Wellington Financial Fund III portfolio company). Here’s a report from the equity research team at Clarus Securities:

The U.S government has extended the biodiesel tax incentive through 2011, making it retroactive for 2010. The legislation is part of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853)”, which was passed into law on Friday. We believe the reinstatement of the incentive provides a strong support for the enforcement of the renewable-content mandates in 2011. We expect BIOX to benefit through better pricing on higher demand. The biodiesel tax incentive is structured to make fuel price competitive with conventional diesel fuel.

The regulation also includes an expedited process for claiming 2010 retroactive credits, which mandates the Internal Revenue Service (IRS) to pay claims within sixty-days after establishing the claim-procedure (thirty days from now).

Impact to BIOX:

• We expect better pricing for biodiesel going forward. Pricing has decreased to ~$0.80/lt after the expiry of the U.S tax credit vs. ~$0.95-$1.10 previously;
• With better pricing, we expect BIOX to substantially reduce its inventory levels freeing up cash;
• BIOX’s 2010 results included a $3.5 million market-value write down. The write-down was to exclude the US$1/gallon related to the tax incentive that was not reinstated.
• We had expected an extension of the incentive, and had included a better pricing assumption for 2011 reflecting the tax-extension. There are no changes to our valuation.

The extension sends a strong signal of support for renewable fuels. We believe the extension is positive for the industry as uncertainty of the credit reinstatement was dampening pricing. We are maintaining our SPEC BUY recommendation and $1.50 per share target.

MRM
(disclosure – Fund III holds warrants in BX)