Biodiesel

Biodiesel: Blood, Guts, and Feathers, Part II
by Eric J. Fry
The Rude Awakening
Wall Street, New York
Tuesday, March 21, 2006

Eric Fry examines a couple of companies poised to profit from the growing interest in Biodiesel.

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Eric Fry, reporting from an energy-intensive neighborhood
in Westchester County, NY...

Decomposed dinosaurs cannot satisfy the globe's energy
needs forever. Indeed, the soaring prices of crude oil and
natural gas suggest that the days of cheap fossil fuels are
behind us. Therefore, in the days of expensive energy that
lie ahead, many different technologies and fuel sources
will emerge to replace fossil fuels. Partial replacements
are emerging already. J.P. Morgan predicts, for example,
that global bio-diesel production will double over the next
two years – consuming 4% of the world's total edible-oil
output by the end of 2007.

In the column below, we'll reveal a few of the public
companies that stand to benefit from the continuing
development of bio-fuels and other "next-generation" energy
technologies...

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Blood, Guts and Feathers, Part II
By Eric J. Fry

Money doesn't grow on trees, but diesel fuel does...sort
of, which partly explains the growing popularity of bio-
diesel. If the world can "grow" its fuel instead of sucking
it our of the ocean floor, the theory goes, we could
produce a "renewable" supply. What's more, bio-diesel is
much cleaner than most competing forms of fuel. These two
happy thoughts, combined with "green legislation,"
government subsidies and, of course, a profit motive, are
powering a worldwide effort to ramp up bio-diesel
production.

Cummins Inc. (NYSE:CMI) is loving it.

As the leading global manufacturer of diesel engines,
Cummins seems to have found itself in exactly the right
place at exactly the right time. As Lou Bass, editor of the
Takeover Trader, pointed out to his subscribers last fall,
"While the rush for energy-efficient (and environmentally
friendly) engines is reaching mania proportions, many
investors are turning a blind eye to an attractive
investment, namely diesel engine manufacturers...Producers
of diesel engines can be picked up at bargain-basement
prices. One of particular interest is Cummins (NYSE:
CMI)...

"Demand for Cummins' products has been recovering strongly
after a three-year slump," Bass explained. "In the mid-to-
long term, new initiatives in the emerging markets of China
and India are gaining traction and should provide a viable
growth opportunity for years to come. As it stands now,
Cummins is the largest foreign investor in the China diesel
engine market."

Biodiesel: Sales to India and China

As the nearby chart illustrates, Cummins' sales to China
and India have been accelerating over recent years. The
company expects its combined sales to these two rapidly
growing economies to top $5 billion by 2010. Meanwhile, in
the "developed world" economies of the U.S. and Europe,
Cummins should capitalize nicely on the increasing use of
bio-diesel. Since Bass' November 18th missive about
Cummins, the company's shares have advanced 23%. But even
so, the stock still trades for less than 9 times estimated
earnings for 2006.

Corning Inc. (NYSE: GLW) might offer another avenue into
the bio-diesel boom. In the January 10, 2006 edition of the
Rude Awakening, Justice Litle, co-editor of Outstanding
Investments, made a fascinating case for Corning as a
"clean diesel" play. Said Litle: "Corning Inc. – the 'fiber
optic company' – has developed an exhaust-filtration
technology that could dramatically boost demand for diesel-
powered vehicles." [For those readers who may have missed
this column, please click here to see it in its entirety:
www.the-rude-awakening.com/RAissues/2006/Jan/RA011006.html]

Corning's new-age filters reduce tailpipe emissions from
diesel engines. Any trend, therefore, that boosts diesel
usage, could boost demand for Corning's tailpipe filters.
"By 2007, emissions from buses and trucks sold in the U.S.
must be up to 90 percent cleaner than 2002 models," Thomas
R. Hinman, vice president and general manager, Corning
Diesel Technologies, recently explained. "These reductions
are primarily the result of the introduction of improved
engine technologies, ultra-low sulfur diesel fuel, and
next-generation emissions control systems that rely upon
the use of our products. On a more global front,
regulations impacting both diesel passenger cars and heavy-
duty vehicles continue to be enacted, representing a
greater than 90-percent reduction in allowable emissions by
2010."

In other words, Corning awaits the years beyond 2007 like a
5-year old awaits Christmas.

Biodiesel: Malaysia

Meanwhile, halfway around the world, many of the Malaysian
plantation companies are creating joint-ventures to convert
palm oil into bio-fuels. While most of these efforts remain
in their infancy, they are very clearly gaining traction,
largely because the Chinese are eager to develop this fuel
source.

"Malaysia will seek partners to build three biodiesel
plants to produce a total of 180,000 metric tons of fuel a
year," the Wall Street Journal reports. "That represents
less than 2% of Malaysia's current palm-oil production, but
the amount could grow. One Malaysian plantation company,
Kulim (Malaysia) Bhd., said that it has been approached by
a European company to jointly set up a biofuel refinery."

The other major plantation companies are pursing similar
joint-ventures. A few months ago, IOI Corp. (IOI MK, which
trades only in Kuala Lumpur), one of Malaysia's biggest
plantation companies, began selling palm stearine, made by
fractionating refined palm oil, to Biox N.A, a private
Dutch power company. IOI also invested 40 million euros in
a joint-venture to operate Europe's largest palm oil
refinery in Rotterdam. Although these new ventures have not
yet contributed to IOI's bottom line, the company should
benefit – directly or indirectly – from the growth of bio-
diesel production. European consumers, alone, could take a
big bite out of the palm oil supply.

"The European Union has decreed that [bio-diesel] must
constitute 2% of all transportation fuel sold there by the
end of this year, and 5.75% by 2010," the Wall Street
Journal reports. "By 2010, Europe's biofuel consumption
should rise to 13 metric million tons - about 10% of
current global edible-oil output - from 1.8 million tons in
2004, according to J.P. Morgan. Most of Europe's biofuel is
made from rapeseed. But as the biofuel market for edible
oils sucks up a growing portion of global supply, demand
for such alternatives as palm oil will increase as well."
In the event, IOI Corp. would benefit.

But even without any kicker from bio-diesel production,
IOI's stock seems fairly cheap. It trades for about 15
times next year's estimate earnings and yields more than
3%. Unfortunately, the stock trades only in Kuala Lumpur.
There are no ADRs. [Your New York editor hopes you don't
consider him a "tease" for mentioning a stock that is so
difficult to purchase. Truth be told, he almost didn't
mention it. But for the sake of those who can buy stocks
anywhere in the world, he did. And for the sake of those
who cannot, he mentioned it anyway, if only to illustrate
how all-encompassing the nascent bio-fuel boom has become.]

Biodiesel: Rentch Inc.

Lastly, our own Dan Denning, editor of Strategic
Investments, suggests Rentch Inc. (AMEX: RTK) as a possible
alternative energy play. Although this somewhat speculative
enterprise loses money every quarter, its coal-to-diesel
technology may put an end to its money-losing legacy.

The company bills itself as, "one of the world's leading
developers of Fischer-Tropsch (FT) coal-to-liquids and gas-
to-liquids technologies. As such, it is [Rentech's] vision
to develop technology and projects to transform
underutilized hydrocarbon resources such as coal, petroleum
coke, remote or stranded natural gas and biomass, into
valuable alternative fuels and clean chemicals..."

To advance its grand aspirations, the company intends to
operate "clean fuels" plants of increasing size and
significance. Its initial Product Development Unit (PDU)
near Denver, Colorado will produce 10-15 barrels per day of
"ultra-clean FT diesel, naphtha and jet fuel."

Meanwhile, Rentech has inked a deal to buy Agrium's (NYSE:
AGU) 830-ton per day fertilizer plant in East Dubuque,
Illinois and convert it into a facility that produces 920
tons of ammonia fertilizer products; 5,800 barrels of FT
fuels; and, 76 megawatts of electric power for the local
grid. Also on the drawing board: a 10,000-barrel-per-day
plant in Mississippi and an 11,000 bpd facility in Wyoming.
It's too early to know if Rentech's ambitious plans will
succeed, but we are intrigued by the effort.
 

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