NEW YORK (TheStreet) -- Since its public launch in 2011, with its promise to "bring the pain" to fossil fuels, renewable fuels outlet KiOR (KIOR) has been bringing the pain to investors. At one point in September 2011, the company was trading at $20.74 per share. Its current price is $2.50.
Yet Bill Gates, no fool he, recently put $15 million into a $100 million equity funding round aimed at building a second KiOR cellulosic fuel plant in Mississippi.
What's going on?
KiOR is using a proprietary biocatalyst which it says can turn any form of biomass, starting with wood chips, into the functional equivalent of petroleum at a price competitive with pulling oil from the ground.
KiOr calls this process "Biomass Fluid Catalytic Cracking" and says it accelerates the natural process that turned dinosaur remnants into oil from millions of years to mere seconds.
It's easy to explain. It's just not easy to scale.
In its third quarter report, the company said it lost $43.1 million on sales of just $720,000. Sounds dire, but sales were just $239,000 in the previous quarter. The plant opened in September, 2012.
KiOR's plant is in Columbus, Miss., a half-hour east of Mississippi State University in Starkville. The University of Alabama is an hour west along the same road. The plant is in Columbus thanks to a $75 million loan from the state of Mississippi, which it got in 2010.
The problem here isn't just the process, but the pace of development, and the yield in fuel that KiOR is getting from its process.
During the most recent quarter, for instance, KiOR turned 10,373 tons of wood chips into 323,841 gallons of fuel. Biofuelsdigest, which follows the field, says that's a yield of 31 gallons of fuel per ton of feedstock, less than half of what it should be. But the company is moving ahead, reporting 167,087 gallons of production in October, meaning it should increase that quarterly total by 50% at current rates.
A second problem is costs, which rose as production ramped up. Biofuelsdigest estimates that KiOR paid $9.27 to make each gallon of fuel it produced last quarter.
Despite all this, some analysts remain bullish. Paul Molchanov at Raymond James expects a second plant to be built after KiOR gets another $100-200 million in debt financing to go alongside that new equity. Mike Ritzenthaler of Piper Jaffray said he maintains an overweight rating on the stock with a price target of $5/share.
Why the bullishness? If the yield problems can be worked out, KiOR has a process, not just a plant, a process that can turn any type of biomass into refinery-grade fuel. Think of it as an old-style wildcatter in the 21st century oilpatch. By this time next year we should know whether they've got a dry hole or a gusher, and whether the "other" oil companies have something to worry about.
So what's Gates up to? Like Khosla, he's betting on a longshot, with a potentially rich return. It's a venture investment.
At the time of publication, Blankenhorn had no positions in stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.