Opinion on  Industrial Biotechnology Corp New (IBOT)
Industrial Biotechnology Corp New

Industrial Biotechnology Corp. (IBOT) uses renewable feedstocks and clean processes to manufacture sustainable, cost effective, and eco-friendly products.

Industrial Biotechnology Corporation , provides products, services and technologies using renewable resources as an alternative to petroleum and traditional manufacturing methods. IBC production processes are eco-efficient and apply and adhere to sustainable practices and standards. IBC accomplishes this with the ALCHEMx Production Platforms™ , which integrates technologies, sustainable manufacturing, and distribution with supply chain partners to meet customer needs and pricing requirements. IBC's renewable resource provider and joint venture projects partner is Cosan SA , the world's largest sugarcane processor. Sugarcane is considered the leading cost efficient, energy balanced and environmentally sustainable fuel source, when compared to fossil and other alternative fuels. IBC provides these cost competitive environmentally responsible solutions to meet global trends and market demand via operating subsidiaries:

- Renewable Fuels of America Corp. (RFAC) plans to import and distribute Brazilian sugar cane ethanol. RFAC intends to take advantage of available trade benefits and leverage existing ethanol distribution networks and infrastructure in the U.S. coastal areas.

- Renewable Chemicals Corp. (RCC) plans to produce ethanol derivative chemicals as an alternative to petroleum-based compounds. Its renewable chemicals will be customized to meet the sustainability and pricing requirements of customers in the consumer packaging, energy, agricultural, pesticides, materials and polymer industries.

- IBC Technologies Inc. is the technology and intellectual property arm of IBOT. It develops technologies and processes for manufacturing chemicals more efficiently, at significantly lower costs, and with substantially lower environmental impact than traditional methods.

A business model capitalizing on renewable energy momentum

IBOT will provide new biotechnologies for meeting global energy challenges. For example, the Company plans to import and distribute Brazilian sugar cane ethanol for use as a fuel in the coastal regions of the United States. In addition, the Company is developing ethanol derived chemicals for consumer packaging, energy, agricultural, pesticides, materials and polymer applications. IBOT is in the process of commercializing its products and establishing an ethanol distribution network and infrastructure in the U.S.

Partnership with Cosan SA - the world's largest sugar cane processor

IBOT's ethanol provider and joint venture partner is Cosan SA, the world's largest sugar cane processor based in Brazil. Cosan is also the second largest ethanol producer and the world's largest sugar producer, with 2008 revenues estimated at $7 billion. Cosan operates 17 mills, two refineries, two port facilities and various warehouses in the central and southern regions of Brazil. Its owned mills have a crushing capacity of 36 million tons and leased mills have a total crushing capacity of 4 million tons. In addition, Cosan has mapped available areas in Brazil and has conducted feasibility studies with the intent of increasing its sugar cane ethanol production to meet anticipated global market demand.

Sugar cane is a better biofuel source than corn

Most of the ethanol currently produced in the United States comes from corn. However, corn's use in biofuels is limited due to a constrained supply, alternative uses of corn as a food source and the debate over governmental subsidies to corn farmers. Unlike corn, sugar cane is not a subsidized crop, is not a food source, and is produced in sufficient quantities to meet demand. In addition, sugar cane is considered the most cost-efficient, energy-balanced and environmentally sustainable fuel source when compared to fossil and other alternative fuels. Additionally, the costs for converting an existing car to running on 85% sugar cane ethanol are only about $100.

Ethanol distribution beginning in late 2008

IBOT plans to begin importing and distributing sugar cane ethanol in the United States and anticipates revenues in the fourth to first quarter of 2008-2009. By 2010, the Company expects to be generating revenues from the production and distribution of ethanol-based chemicals, particularly ethylene. Engineering and feasibility studies are underway for a plant location with construction time of approximately 16-20 months. Increased penetration of the ethanol market and the development of other ethanol-based chemicals are targeted in 2012.

$435 million in GROSS sales targeted by year-end 2010

IBOT's RFAC subsidiary has identified several storage tank locations and ethanol distributors in the mid-Atlantic and Southeastern United States, and is negotiating and finalizing distribution arrangements. By year-end 2010, IBOT expects to begin operating the first plant for producing sugar cane ethanol derivative chemicals for consumer packaging applications.

IBOT targets 2009 sales approaching $260 million and 2010 sales in the $435 million range.

Proven management team

IBOT's management team is comprised of top scientists, international lawyers, business leaders and biotechnology specialists.

CEO Andy Badolato was the founder, president and director of MILCOM Technologies, a company that successfully licensed more than $1.6 billion of research and development from Lockheed Martin. MILCOM, a leader in commercializing defense-related technologies, has launched 13 companies, raising an aggregate of more than $600 million in venture capital.

Gurinder Shahi, IBOT's chief technologist and chairman of its Scientific Advisory Board, is a leading expert on technology innovation and change management in healthcare and life sciences. He played a key role in developing the International Vaccine Institute, the Asia-Pacific International Molecular Biology Network and the Global BioBusiness Initiative. He has also been actively involved in numerous technology businesses, including Lynk Biotechnologies (Asia) and Industrial Biotechnology Corp. (United States/Europe/Asia/Latin America).

Strong outlook for biofuels market

According to Clean Edge research, the global biofuels market will grow from $15.7 billion in 2005 to $52.5 billion by 2015. Emerging Markets Online indicates U.S. biodiesel consumption grew from 25 million gallons in 2004 to 750 million gallons in 2007. The U.S. biodiesel market must grow significantly to reach levels comparable to its European counterparts. In Europe, biodiesel represents 2% of total on-road transportation fuel consumption and is expected to reach 6% by 2010. In the United States, biodiesel accounted for less than 0.5% of all petro-diesel on-road consumption in 2005 (1) .

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1. http://www.emerging-markets.com/biodiesel/default.asp

IBOT is developing new biotechnologies to meet global energy challenges. The Company makes use of biological feedstocks and processes to manufacture industrial products that are renewable, economically advantageous and environmentally friendly.

IBOT is leveraging its ALCHEMx Production Platforms™ which integrate technologies, manufacturing, and distribution to produce eco-efficient, cost-effective energy solutions. The Company has identified supply chain partners and is assembling the infrastructure for producing and distributing fuels and chemical feedstock from sustainable sources.

IBOT's business model

Source:Company's presentations

IBOT's renewable resources provider and joint venture projects partner is Cosan SA, the world's largest sugar cane processor based in Brazil. IBOT plans to import and distribute Brazilian sugar cane ethanol for use as a fuel in the United States. Sugar cane is considered the most cost-efficient fuel source and the Company plans to capitalize on sugar cane's competitive advantages to penetrate the U.S. biofuels market in USA coastal areas . Sugar cane ethanol has a number of advantages:

Energy Produced - When the entire process is considered, from the planting of sugarcane to the use of ethanol as a motor vehicle fuel, sugarcane ethanol produces 9.3 units of clean, renewable fuel for every unit of fossil energy utilized. Ethanol produced from other feedstocks such as sugarbeets, cereals and corn, manages a 2-to-1 ratio today. (UNICA 2008)

Environmental Impact - Cane ethanol reduces greenhouse gas emissions by up to 90% compared to gasoline, a reduction unmatched by any other biofuel produced with existing technology and comparable to what is attained with second-generation biofuels.

Sugarcane also captures more carbon when compared to crops such as corn or soybeans because it is a unique semi-perennial crop only replanted every six years. In addition, sugarcane actually generates a carbon credit, capturing significantly larger amounts of carbon than the quantities originally stocked on degraded pastures - the expansion area of choice for sugarcane in Brazil. (UNICA 2008)

IBOT's biofuel business benefits from rising oil prices, the depletion of carbon-based resources and increasing environmental concerns. Oil prices are rising at an unprecedented rate, and greenhouse gases associated with carbon-based fuels are causing environmental concerns and creating a "green" choices backlash.

- Renewable Fuels of America Corp.;
- Renewable Chemicals Corp.; and
- IBC Technologies Inc.

Renewable Fuels of America Corp.

Renewable Fuels of America Corp. plans to import and distribute Brazilian sugar cane ethanol. RFAC plans to leverage available partnership agreements, trade benefits, and existing ethanol distribution networks and infrastructure in the U.S. mid-Atlantic coastal region to sell sugar cane ethanol. Due to the commodity nature of alternative fuels and RFAC's joint venture distribution business model, net margins are estimated at an average of 1.5%

The Company's joint venture partner, Cosan SA, is the world's largest sugar cane ethanol provider. Cosan is also the largest grower and processor of sugar cane, the second largest ethanol producer and the world's leading sugar producer with 2008 sales estimated at $7 billion.

Cosan operates 17 mills, two refineries, two port facilities, and various warehouses in Brazil, and is mapping new areas and conducting feasibility studies, considering soil, weather and export logistics in preparation for expanding production capacity to meet anticipated U.S. sugar cane ethanol demand.

Most of the ethanol produced in the United States comes from corn, but this is not an optimal feedstock for several reasons. The biggest drawbacks are the inability to increase corn production to levels needed to produce ethanol economically, competitive uses for corn as a food source, and the debate over governmental subsidies to corn farmers. Unlike corn, sugar cane is not a subsidized product, is not a food source and can be grown in sufficient quantities to meet demand. The chart below compares sugar cane and corn as biofuel feedstocks.

Brazilian Sugar cane vs. U.S. corn

Source:Company's presentations

Renewable Chemicals Corp.

Renewable Chemicals Corp. plans to produce ethanol derivative chemicals as an alternative to petroleum-based compounds. Its renewable chemicals will be customized to meet the specific sustainability and pricing requirements of the consumer packaging, energy, agricultural, pesticides, materials and polymer industries. A wide range of derivative chemicals can be developed from ethanol.

IBOT's chemical opportunities

Source: Company's presentations

Cosan SA is IBOT's joint venture plant production partner and sugarcane ethanol supplier, participating with IBOT on those ethanol chemical projects that are economically feasible. RCC plans to develop production plants leveraging existing petrochemical infrastructure when possible via joint ventures.

During the 1950s and 1960s, ethanol was used to produce commodity chemicals in Brazil, India and Australia. After a period of decline in the early 1970s, the ethanol-based industry staged a comeback due to escalating oil prices, geopolitical considerations and the need to reduce dependence on foreign oil. Rising petroleum prices, ethanol efficiency improvements and environmental advantages are driving a shift back to ethanol as a chemical feedstock source.

Technological progress has led to significant productivity improvements
and cost reductions in ethanol production. With oil prices at $130 per barrel, ethanol has emerged as a viable alternative that meets environmental concerns and is sustainable and eco-efficient.

Ethylene

Source: Company's presentations

Ethylene is the precursor chemical needed to make renewable high-density and low-density polyethylene used in consumer packaging. Ethylene made from surgarcane ethanol has the 'Same properties, processing, and performance as polyethylene made from natural gas or oil feedstocks -because the polyethylene molecules are the same (American Chemistry Council) .In the 1930s and 1940s, ethanol dehydration was an important source of ethylene for the chemical and polymer industries in the United States and UK. IBOT in conjunction with Cosan are in planning stages to develop an ethylene-from-sugarcane ethanol plant in the U.S. coastal areas. Feasability studies and engineering are in progress. Demand for renewable packaging is strong;

"There has also been growing demand from retail giants like Wal-Mart Stores Inc., newly sensitive to environmental pressure, for packaging made from renewable plastic. While the fledgling biochemicals market is meager, some adherents figure it could be a $150 billion industry if optimistic projections -- that they will replace 10% of the petroleum used to make chemicals globally by 2020 -- pan out." (Wall Street Journal)

Additionally:

Wal-Mart CEO Lee Scott laid out three environmental goals for the company: "to be supplied 10 percent by renewable energy, to create zero waste; and to sell products that sustain not only company resources, but the environment…It is probably the most significant initiative that is transforming the whole packaging industry.. Companies like P&G and Unilever have to look at their packaging in order to get the incentives at Wal-Mart." (ADWEEK)

Several other companies have already announced plans to install ethylene-from-ethanol plants:

1. Braskem is constructing at least two ethylene-from-ethanol plants: the first plant, scheduled to start-up in 2010, set to be located in Bahia or Rio Grande do Sul, will have a capacity of 200,000 tons per year of polyethylene; the second plant is planned for a 2013 start-up in Sao Paulo.
2. Dow and Crystalsev have announced a joint venture to produce 350,000 tons per year of LLDPE (Dowlex) from ethanol-via-ethylene by 2011.
3. Solvay Indupa is planning to use sugar cane ethanol to produce 60,000 tons per year of ethylene as a raw material for PVC; start-up is scheduled for late 2010.
4. China: Songyuan Ji'an Biochemical is planning a 300,000 ton per year ethanol-based ethylene plant in Jilin Province.

IBC Technologies Inc.

This business is the technology and intellectual property arm for IBOT. It focuses on new approaches for biologically manufacturing chemicals more efficiently, at significantly lower costs, and with substantially lower environmental impact than traditional methods.

IBC Technologies targets the development of:

- Biofuels from alternative crops that result in lower ethanol production costs;
- Conversion technologies - the ability to take ethanol and ethylene and convert it into propylene and other higher olefins;
- Downstream technologies - the conversion of ethanol and ethylene to other products;
- Lignocelluloses and biomass for making ethanol and other products;
- New second generation fuel molecules made from renewable sources;
- Renewable energy technologies, including more efficient and higher yielding bio-ethanol, biodiesel, biogas and biopetroleum generation technologies; and
- Renewable chemical technologies (including proprietary processes for generating high value chemicals from bio-based feedstock).

Clean energy markets

by environmental and safety concerns, clean energy is becoming increasingly competitive with its "dirtier" counterparts.

Wind power, for example, is now one of the least expensive and most easily deployed energy sources. Ethanol has gained favor for vehicle use in both the United States and abroad. Biodiesel, made from a wide range of animal and vegetable oils, is priced within striking distance of petroleum-based diesel. Even solar, still relatively expensive without subsidies, competes favorably in some locations and is often the cheapest power choice in remote regions.

Clean energy markets trends, $ billion

Source: http://www.cleanedge.com/reports-trends2006.php

Benefiting from strong federal support and multi-billion dollar investments in research and development, global clean-energy markets are expected to bloom over the next decade. According to Clean Edge research, biofuels (global manufacturing and wholesale pricing of ethanol and biodiesel) will grow from $15.7 billion in 2005 to $52.5 billion by 2015. Wind power (new installation capital costs) will expand from $11.8 billion in 2005 to $48.5 billion in 2015. Solar photovoltaics (including modules, system components, and installation) will grow from an $11.2 billion industry in 2005 to $51.1 billion by 2015. The fuel cell and distributed hydrogen market will grow from $1.2 billion last year to $15.1 billion by 2015 (2) .

In total, these four clean energy technologies, which generated revenues of $40 billion in 2005, will grow four-fold in 10 years to $167 billion.

According to Emerging Markets Online, the global market for biodiesel is poised for explosive growth. Europe currently represents 90% of global biodiesel consumption and production; however, the United States is increasing production at a faster rate than Europe.

Emerging Markets Online predicts biodiesel could represent as much as 20% of all on-road diesel used in Brazil, Europe, China and India by 2020. This prospect may be realized faster than anticipated if governments continue to aggressively pursue clean energy targets, enact investor-friendly tax incentives for biodiesel production and blending, and help promote research and development of new biodiesel feedstocks such as algae biodiesel.

According to Emerging Markets Online, U.S. biodiesel consumption grew from 25 million gallons in 2004 to 300 million gallons in 2006, and was estimated at 750 million gallons in 2007. The U.S. biodiesel market must grow significantly to reach European levels. In Europe, biodiesel represents 2% of total on-road transportation fuel consumption and is expected to reach 6% by 2010. In the United States, biodiesel sales recently amounted to less than 0.5% of all petro-diesel on-road consumption (3) .

Prices for renewable energy stocks rose in the second half of 2007 after the U.S. Senate passed a revised energy bill designed to reduce dependence on imported oil by imposing the biggest increase in fuel-efficiency standards in 32 years. The energy bill mandated a six-fold increase in renewable fuel usage as a blend with gasoline to 36 billion gallons annually by 2022.

U.S. energy consumption by energy source, 2002-2006, (Quadrillion Btu)

Source:www.eia.doe.gov.

Petroleum market

Oil prices have doubled in the last year and risen 40% since the beginning of 2008, boosted by expectations that supply will struggle to meet demand from newly industrializing countries such as China and India. In addition to supply/demand fundamentals, there are a series of geopolitical factors also contributing to skyrocketing oil prices, including regional tensions in Nigeria, Iraq and Iran. Oil prices closed near a record $150 a barrel in July 2008, reacting to continued weakness in the U.S. dollar and an emergency shutdown of a North Sea oil production platform.

Source: http://www.wtrg.com/daily/crudeoilprice.html

Oil seed crop prices

Biodiesel refiners are challenged by rising commodity and vegetable oil prices. The raw material alone can cost more than $4 a gallon, which is slightly more than the wholesale price of refined diesel. Without a federal subsidy (the federal government gives subsidies of 50 cents per gallon for used oil and animal fat and $1 a gallon for fresh oil), most biodiesel manufacturers would lose money.

Soybean oil weekly price chart

Source http://futures.tradingcharts.com/chart/SO/W?1196190901.

Another important issue for biodiesel companies is reducing capital costs. Plant costs can range between 80 cents and $1.25 per gallon of installed capacity, which further reduces the competitiveness of biodiesel.

Rising soybean oil prices are dampening the prospects of the biodiesel industry. Because of high soybean oil prices, construction has stopped on the North Prairie Productions biodiesel plant. Higher soybean oil prices make the end-product too expensive relative to regular diesel. The going rate for soybean oil has more than doubled since planning for this new plant began.

Despite these concerns, large companies are attracted to the biodiesel market by rising demand and increasingly stringent emissions requirements which raise refining costs for conventional diesel fuel. IBOT could be a major beneficiary of current trends. Ethanol derived from sugar cane would be cheaper to produce and address vegetable oil and corn cost and supply issues.

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2 .http://www.cleanedge.com/reports-trends2006.php
3 http://www.emerging-markets.com/biodiesel/default.asp

The Company is in an early development stage and has yet to report revenues. IBOT anticipates to commence revenues from alternative fuel distribution in 4th -1st quarter of 2008-2009 upon finalizing distribution and storage logistics in targeted USA coastal areas.

Incomes statement, $

Source: Company 10-K and 10-Q

The Company will likely require additional equity and/or debt financing to fund its growth plans. Cash and equivalents totalled $2.5 million at the end of the 2008 first quarter.

Balance sheet, $

Source:Company 10-K and 10-Q

Outlook

The Company's early-development stage and lack of revenues make it difficult to assess its future financial prospects. However, based on our understanding of IBOT's business model and our discussions with management, we believe the Company has a good chance of becoming a rising star in the Industrial Biotechnology renewable chemicals Sector and alternative fuels market.

IBOT has formed a strategic alliance with Cosan SA, to provide ethanol for the Company's Renewable Fuels of America Inc. and Renewable Chemicals Corp. subsidiaries. RFAC has identified storage tank locations and ethanol distributors and plans to commence shipments of sugar cane ethanol into the U.S. market in 4th-1st quarter 2008 -2009. We will conservatively assume the Company will start generating revenue in 2009

IBOT plans to:

1. Import and distribute ethanol in the United States
2. Commence manufacturing of ethanol-based chemicals for consumer packaging during 2010 -2011.
3. Increase its penetration of the ethanol market and develop other ethanol-based chemicals beginning in 2012.

IBOT's business plan

Source: Company's presentations

Based on our discussions with management, we forecast revenues and net income as follows:

Revenue and net income forecast, $ thousands

Source: Analyst estimates
RFAC - Renewable Fuels of America
BRCC - Renewable Chemicals Corp.

Renewable Fuels of America is likely to report solid revenues mainly due to the commodity aspect of ethanol and fuels business and low margins estimated at 1.5% average. The revenue projections for 2009 assume commercialization of 10 million gallons of ethanol per month which is not an important amount but are representing high revenue due to the high price of ethanol. Meanwhile the margins are low in the range of 1.5%.

The Renewable Chemicals Corp. is likely to produce revenue beginning with 2011. The chemical side is different due to its uniqueness and the time to market advantage at present. The margins are higher in the range of 10-20% and IBOT is projecting an 18% carry or equity in the plant after dilution for funds required for the plant.

Peer comparison

For valuation purposes, we compared IBOT with other ethanol producers and distributors in the United States. The peer companies trade at 14 times forward P/E multiples and 0.20-0.30 time forward P/S multiples. We believe IBOT should be valued at similar multiples.

Unlike competitors, IBOT is not constrained by limited corn and soybean production and high prices. IBOT focuses on ethanol from sugar cane. Brazil by itself could create enough sugar plantations to supply U.S. ethanol demand without damaging its rain forests or constraining sugar supplies.

Comparative analysis

Source: Yahoo Finance

Applying our 2009 revenue forecast to the peer group's 0.3 times forward P/S multiple, we derive a 2.20 target price for IBOT shares. Our valuation model assumes 37 million fully diluted shares outstanding and 20% dilution resulting from future equity sales. Accordingly, we are initiating coverage of IBOT with a Speculative Buy rating and a 2.20 price target.

Inherent Business risks

IBOT is pursuing an aggressive growth strategy in the renewable energy sector. While the Company has provided an optimistic outlook concerning future revenues and profitability, there is no assurance it will be able to maintain this growth pace or capitalize on its ethanol from sugar cane distribution operations. Opportunities will be limited if its expansion is not made on economically favorable terms.

Additional capital required to continue operations

The Company will require external financing to complete the development of its distribution network and acquire the initial inventory of ethanol to commence commercialization. If the Company fails to obtain sufficient funds, implementation of its business plan could stall, affecting our valuation model.

History of losses

Its history of losses, negative operating cash flows, lack of revenues and 7.6 million stockholders' equity deficit are causes for concern. In addition, the Company has relied on debt financing in the past.

Mr. Badolato was former vice president of corporate finance for St. James, the founder and initial seed round investor of Inktomi, a company that obtained a 20 billion market valuation. Mr. Badolato was also president and a director of SinoFresh HealthCare Inc., a developer and marketer of therapies for inflammatory and infectious diseases of the upper respiratory system. Mr. Badolato successfully launched its lead product, SinoFresh™ Nasal, Oral & Sinus Care, through a national distribution contract that made it available in more than 20,000 retail outlets nationwide.

Mr. Badolato is a co-founder of Industrial Biotechnology Corp. He is also a managing director of White Knights & Vultures LLC., a venture capital hedge fund. Mr. Badolato graduated from St. Thomas of Villanova University in Miami, Florida, with a degree in business.