Thursday, January 24, 2013

JBII. A Critical Assessment

 5 Reasons JBI May Rise Again, Like A Phoenix From The Ashes
January 24, 2013 | 1 comment | about: JBII.PK
Disclosure: I am long JBII.PK. (More...)

Anyone can build plastic and steel. Only a few can put intelligence in it. That's where the money is.
-- John Bordynuik, Founder and Chief of Technology, JBI, Inc.

JBI, Inc. (JBII.PK) announced on Wednesday, January 23 that the SEC approved a settlement over legacy accounting issues stemming from 2009. The company agreed to a $150,000 civil penalty, a proverbial slap on the wrist considering the legal expenses that would likely come from a trial, especially considering a fine of this small size is typical of the type of for filing errors as opposed to fraud (which start at $250k per incident). JBII was trading over $4.00 per share in the month that the Wells Notice hit in 2011. With this dark cloud now lifted, JBII is now in a position to focus solely on is technologically disruptive operations.

JBII has developed a patent-pending process called "Plastic2Oil" (or P2O) that takes unsorted, unwashed waste plastic and turns it into consumer-ready in-spec fuel. Its process utilizes a proprietary trade secret catalyst to crack the long hydrocarbon chains in plastic similar to the way oil refineries crack long hydrocarbon chains in oil.

The process runs on its own off-gas and is mostly automated leaving very little labor and energy costs to run. JBII's process has been validated as economically viable by SAIC (SAI), Rock-Tenn (RKT) and a host of others. JBII is currently operating two P2O processors with a 3rd in construction/assembly. Production and sales are expected and forecasted to be consistently ramping up significantly and will allow them to achieve cash flow positive results during the first quarter of 2013.

Why is this a big deal?

The never-ending quest to find alternative sources of energy that can cleanly be made and still are economically viable has failed and will continue to fail according to the US Energy Information Administration (see table below). The goal of any alternative energy concept is (or at least should be) to produce energy that cost less to make than traditional means. Nuclear, incineration, hydro, geothermal, wind, solar, etc. -- all are still too expensive despite trillions of dollars having been poured into these technologies over the years. The reason for their failures is either prohibitively high up front capital costs that bare fair too little energy return (e.g. - solar and wind), have high energy costs themselves (e.g. - biomass incineration), or high labor cost (e.g. - ethanol and other biofuels).

If JBII achieves cash-flow positive operational status as quickly as it forecasts, such achievement with such a low capital cost alternative energy process will be the first of its kind. Succeeding in this goal would be a first across the green energy spectrum in North America and would be considered a significant victory for the green energy movement.

5 Reasons To Be Excited About JBII Now:

1. Cash Flow Positive Forecast

As previously mentioned, JBII forecasts a large ramp up in sales and cash flow positive operations in Q1 2013. Q4 numbers still aren't out yet, but JBII did volunteer that the month of October was a record month for production. JBII's CEO Kevin Rauber left his previous company and current JBII partner Rock-Tenn where he headed the division that won Business Unit of the Year. He took a big pay cut to come work at JBII. Kevin stated in November 2012:

"As we continue to make progress in executing our business plan, we anticipate achieving increases in production and revenue that we expect will allow us to achieve cash flow positive results during the first quarter of 2013"

This statement was repeated in the latest 10Q filing that was prepared and signed by CFO Matt Ingham.

2. Valuation

Pyrolysis-catalyst company KiOR, Inc. (KIOR) uses wood feedstock instead of plastic. The executives there seem rather excited: they hope to have any gross profit from making fuel from waste in the year 2015, over 2 years later than JBII.

"With scale-up, total cost per gallon drops to $5.95 by 2013, $3.73 per gallon in 2014, and the magic sub-$3.00 figure in 2015 when it is expected to reach $2.62 per gallon at full-scale."

As I type this, investors continue to embrace KIOR's future so highly, they continue to award it a market cap of around $650 million. JBII would be over $7.00 per share with a similar market cap. How would the market embrace a cash flow positive JBII in 2013 while KIOR hopes to achieve it by maybe 2015? (and with massive capital costs for KIOR no less)

3. Key Partner Rock-Tenn

JBII's current operations are in Niagara Falls, NY where JBII expects that single location alone will make them cash flow positive. For expansion, JBII and Rock-Tenn Company have signed a exclusive 10 year agreement. According to the agreement, "RockTenn's paper mills and MRFs currently produce thousands of tons of plastic per day. To handle the plastic waste stream, RockTenn has been storing this by-product in company-owned plastic-only monofill sites for several years. The agreement gives JBI the exclusive rights to mine plastic from these sites.....RockTenn has the industrial relationship and feedstock to support hundreds of Plastic2Oil(TM) processors."

RKT as a partner gives JBII the potential to expand rapidly and cheaply at their locations that have many permits, security, parking lots, and other infrastructure at no cost to JBII. In return, RKT is offered a first right to purchase fuel from JBII at a 20% discount to rack prices. This is a mutually beneficial relationship as not only does RKT pride itself as a green company but they spend hundreds of millions in fuel every year so the cost savings on discounted fuel could be very significant as it would all fall directly to RKT's bottom line as an extremely profitable revenue stream for them. This is the type of relationship that could get JBII positive exposure fast to RKT's institutional investors as JBII expands and word of mouth flows about what JBII is doing on how RKT is saving so much money on fuel.

The first RKT location was recently revealed that it will be in Jacksonville, Florida.

4. Backers

JBII has some serious muscle backing them up. Not very often do you see any prominent investors backing OTC microcap stocks let alone a large list of them including billionaire Meyer Luskin, CEO of Scope Industries, who recently came back and made another large investment in JBII. Also of particular note is Michael Dorrell & Trent Vichie of Blackstone (BX) fame among many others. Also the Chairman of the Board, John Wesson, made a 6 figure investment in JBII in 2012 (on top of other large investments in previous years).

5. Media

Media coverage of a company can often have a dramatic effect on stock prices, especially for microcaps. JBII already has a history of some positive media coverage (which sometimes sent the stock up hundreds of percent). If and when JBII achieves cash flow positive, perhaps it should be expected there will be more forthcoming and could have a stronger story being one of success rather than hope.

Four Examples:

Discovery Channel:

From non-recycled plastics to liquid gold, it's a beautiful thing. Plastics industry is paying very close attention to what JBI is doing. This is a big deal. This could be the final piece of the sustainability puzzle for plastics.
-- Greg Wilkenson, Plastic Industry Consultant & former President and CEO at Canadian Plastics Industry Association

Local Televsion:

Every waste hauler in the United States, Canada, and a lot of other places, is going to have one of these units located on site, because now they can take plastic they would otherwise pay to landfill, and they can convert it into fuel to run their vehicles.
-- Paul Dyster, mayor of Niagara Falls, N.Y.

National Public Radio:

They're getting value from something that would otherwise go to the landfill because the plastics most of them are looking for, the plastics that are not easily recycled, they're of low quality or mixed-plastic types, or they're dirty - things that wouldn't be accepted into a recycler. -- Carson Maxted of Resource Recycling. And because there's no lack of waste-plastic supply, and no lack of demand for oil, Maxted says the technology has the potential to transform both industries.

Local News

Our ultimate goal is to try to lure the company, JBI, to set up an operation at our agricultural renewable energy park at the landfill site and hopefully, that will open it up to the entire region to help solve this problem.
-- Jim Zecca, director of the Madison County Solid Waste and Sanitation Department.

Thanks to Brigg!

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