Seventeen weeks into making the world's first commercial-scale bio-isobutanol, Gevo has halted production in Luverne, Minnesota, and temporarily switched the plant back to ethanol while it works out fermentation problems.
CEO Patrick Gruber told analysts late Monday that the company has pinpointed the issues that would keep the plant from reaching his monthly output goal of 1 million gallons by December. He said production would resume sometime in 2013.
Gruber said reverting to corn-based ethanol allows the company to save money while it tweaks the underlying organism and fermentation process, rather than continuing to make isobutanol at a loss.
Analysts took the announcement in stride, a reaction that Raymond James' Pavel Molchanov compared with the market's more negative assessment when renewable chemical maker Amyris announced its own scale-up problems in February.
"Amyris initially had guidance that was much more aggressive than anything Gevo ever promised," Molchanov said in an email. "If Amyris hadn't been as aggressive with its guidance, the market would not have been as shocked when the scale-up problems were disclosed."
Gruber said the company has an idea when it will resume isobutanol production, but he would rather not set a firm deadline.
"We're one of these little volatile stocks," he said during a conference call with analysts. "I'm trying to avoid too many rigid milestones."
Gevo retrofitted a 22 million gal/year ethanol plant and started isobutanol production in late May. The plant is designed to scale up to 18 million gal/year.
Isobutanol is a four-carbon chemical that can be either mixed into gasoline or used to make end-consumer products such as plastics, fibers and paints, which are typically derived from crude oil.
Bio-isobutanol can help refiners meet their renewable fuel obligations more easily than corn-based ethanol. Its properties allow fuel blenders to use higher concentrations of the chemical into fossil fuel supplies without requiring changes to car engines.
Raymond James' Molchanov said all industrial biotech is inherently difficult to scale up, with plants facing their own set of issues while they try to harness living organisms to make chemicals and fuels.
"In this context, Gevo's decision to temporarily switch back to ethanol -- a switch enabled by its plant architecture -- should be seen as just the latest example of the industry's frustrating but inevitable growing pains," Molchanov wrote in a note Tuesday.
Molchanov pointed to Gruber's mid-August purchase of $49,000 in company shares as evidence that the announcement should not scare away investment.
"We are always fans of insider buying, particularly at early-stage companies such as this," he said.
Gruber said he would not go into detail about the known production problems for competitive reasons. He described them as growing pains typical of new fermentation-based technologies.
"Mother Nature always tries to mess with us," he said.
Gruber said knowing the process needs work now is "way better" than being surprised after major deliveries begin. He said one of the greatest mistakes that companies in the same position make is to push supply to customers prematurely and then pull it when a production problem pops up.
"That's a bad, bad, bad idea -- a sure way to ruin a customer relationship," he said.
Gruber said the delay does not put offtake agreements with Sasol and Mansfield Oil in jeopardy.
"We know isobutanol can be made," he said. "We've done it. That's unequivocal. Knowing something can be done simplifies the solution dramatically. This is about making it work better, consistency of quality and quantity, and becoming a reliable supplier."
Shares of Gevo were trading around $2.20 Tuesday afternoon, down more than a third from Monday's close of $3.31.
Gevo is backed by oil major Total and specialty chemicals producer Lanxess AG.
