Year End #6: SZYM, Where did I go so wrong?
Solazyme was a disaster. I knew better than to buy a development company which was losing money, but they promised that they were close, VERY close, to large-scale production and profitability.
I started buying SZYM in Jan of 2013 at $7.30 in very small amounts and added gradually at $8, at $9, at $10, at $11 and even, heaven forgive me, at over $12 as the story got better and better. They promised their US plant would open in the first quarter of 2014, and that their huge, many times larger plant in Brazil would not only be open, but actually pretty close to running full bore by the end of the second quarter. They announced Encapso, which made drilling more efficient. This all would change them from a small money-losing development company, to a large scale, commercial production company, no longer money-losing and soon profitable, and even very profitable. This was going to become a huge, multiproduct company with products from the food industry to cosmetics, to industrial oils!
The time line I’m giving you is just from memory, but the US plant opened on schedule and started producing on a small-scale basis. Just a teaser, though. What mattered was the huge Brazil plant. The first warnings of trouble were when they didn’t get it opened on time. They assured everyone that they were having no technical problems with their process. Just a problem in getting consistent electricity from their partner. And the problem continued and continued.
The price started dropping, and with all their reassurances it looked like a bargain at $8 when it had recently been at $12. On October 17 of this year I decided to cut my risk at $6.40 and sold half my position, and foolishly kept the rest, not wanting to give up. On Nov 5, after the close, they announced their 3rd quarter results – AND an entire reformulation of their business:
In the broader commodity markets, pricing is challenged for the semi-commodity oils that most of our first-generation oil products compete with, such as enhanced palm kernel oil. So, to cite a specific example, palm kernel oil was selling for about $907 per metric ton as of last week versus about $2,000 just a few years ago, and our overall input costs have not dropped commensurately over this period.
Consideration of these factors has led us to make some adjustments in our strategies to drive capital efficiency and commercial success. We will narrow our production focus to smaller volumes of higher-value products at both Moema and Clinton/Galva. We will prioritize cash management and product margin over a rapid capacity ramp. We, therefore, no longer plan to produce at nameplate capacity within 12 to 18 months.
We believe this is economically prudent in the short term while better positioning us for long-term opportunities. This will enable us to better manage our capital as we ramp production at the plants, descend the cost curve and continue commercializing and driving increased demand for high-margin products such as Encapso and specialty food oils.
Basically they were abandoning any hope of large-scale commercialization at least for 18 months, and with no time line after that. They were going to remain a small money-losing development company, which was going to try to cut its losses by firing workforce, cutting salaries, focusing on small scale high margin products. They were going to be carrying their two plants half or more empty, which would greatly increase their cost of goods sold, and reduce margins. They’d obviously need more money raises, if they could find buyers, which would dilute the shares further.
This wasn’t the hypothesis that I, or many others signed on for. The next morning they opened at about $3.75, and I sold out the other half of my position there. It closed that day at $3.14, and closed today at $2.58. (It’s been as low as $2.16).
They started Jan 1st of 2014 at $11.19. I got out at an average price of about $5.00, so this was a significant loss for my portfolio for the year. Where did I go wrong? It’s easy. This was still a development company, which hadn’t got a real business going yet when I bought in. I never should have done that. I should have waited until Moema was up and running, and the company was profitable, even if I paid a lot more. The message is clear: Avoid development companies that are just starting out, no matter how good the story! Nuf said.