Bim
LanzaTech (NASDAQ:LNZA) is a clean technology company operating at the intersection of carbon capture and synthetic biology. I previously wrote about the company in early 2023, detailing its business and technology. The stock price has been volatile since then, but is currently around where it started.
While the stock has had a tough time since LanzaTech became public, the business is steadily progressing. There remain questions about market size, competitive positioning and margins at scale, but performance so far has been solid given the difficult macro environment. LanzaTech’s share price is still relatively high given the nascent state of the business, but the company is growing into its valuation.
Pipeline
LanzaTech’s growth is being driven by an expanding pipeline of projects, with a steady stream of new feasibility studies and progression of existing projects towards operational status.
LanzaTech has advanced two co-development projects with Brookfield through various early-stage engineering milestones, and wants to progress one of these projects to advanced engineering in early 2024. A Basic Engineering Package was also recently completed for NextChem’s 64,000 ton per year plant in Italy.
Figure 1: LanzaTech Active Customer Biorefining Project Pipeline (source: LanzaTech)
In May 2023 ArcelorMittal began producing ethanol samples from its 200 million Euro facility in Belgium. Commercial scale production was expected to ramp up in the following months. The plant has an 80 million liter per year capacity for the production of ethanol.
LanzaTech previously had six commercial scale facilities with total annual nameplate capacity of around 300,000 tons of ethanol. The recent startup of IndianOil Corporation’s facility at the Panipat Refinery now brings this figure to seven.
Figure 2: LanzaTech Commercial-Scale Plants (source: LanzaTech)
LanzaTech also continues to advance new strains in the pursuit of the production of additional molecules. The company has reportedly achieved target production of Monoethylene Glycol, a key ingredient in polyethylene terephthalate. LanzaTech is also currently working on a strain to produce Isopropyl Alcohol, a 3 billion USD market in 2022.
Moving from ethanol production to other molecules is a large technological leap. If LanzaTech is able to profitably do this at scale, it would both significantly increase its addressable market and further legitimize its capabilities. As of 2021, LanzaTech had designed and modeled over 500 pathways and were able to demonstrate direct synthesis of more than 100 molecules from gas. Without knowing production scale and titer this metric is somewhat meaningless, though.
Partnership Announcements
LanzaTech has made a steady stream of partnership announcements in recent months, although many of these are just feasibility studies with unclear long-term financial implications.
LanzaTech and Tadweer (Abu Dhabi Waste Management Company) have initiated a study into the feasibility of producing SAF from municipal and commercial solid waste. Up to 350,000 tons of waste could be transformed into 200,000 tons of ethanol annually, resulting in 120,000 tons of SAF each year.
LanzaTech also recently announced a JV with the Olayan Financing Company to deploy LanzaTech’s technology in Saudi Arabia and other countries in the Middle East.
LanzaTech and ADNOC have entered into a partnership exploring opportunities to use LanzaTech’s technology to produce molecules from waste gases.
LanzaTech and GAIL, India’s largest natural gas company, announced a partnership exploring using LanzaTech’s technology to convert GAIL’s renewable H2 and CO2 gas streams into biorecycled materials.
LanzaJet
LanzaJet is a Sustainable Aviation Fuel company which LanzaTech helped launch in 2020 and still retains a 25% ownership stake in. Upon the achievement of certain demonstration facility milestones, LanzaTech is also set to receive additional shares in LanzaJet, which would bring the company’s ownership stake to 40-57%.
LanzaJet is targeting production at the 10 million gallon per year Freedom Pines Fuels facility in Georgia in early 2024. The majority of production will be SAF, with some renewable diesel. The project is in collaboration with the Pacific Northwest National Lab and the US Department of Energy.
LanzaTech also recently announced plans for a waste carbon to SAF plant in Wales. Basic Engineering Packages were recently delivered for Project Dragon, LanzaJet’s first SAF project in the UK. The facility will reportedly supply around 1% of the UK’s jet fuel needs. In support of the project, LanzaTech has received 25 million pounds from the Department for Transport’s Advanced Fuels Fund. Construction is expected to begin in 2025, subject to approvals, with production commencing in 2026/2027.
LanzaJet was also recently selected by Air New Zealand and the New Zealand Ministry for Business, Innovation, and Employment for the second stage of a SAF feasibility study. The study is focused on the use of forestry residue in New Zealand to produce SAF.
While this business is likely to grow significantly, and may create shareholder value, I question how attractive it will ultimately be when it is simply based on the chemical conversion of ethanol into SAF. In addition, there is already significant competition and LanzaJet is only differentiated by feedstock from LanzaTech.
Neste has been producing SAF for over 10 years and produces 100,000 tons annually, with plans to expand this to 1.5 million tons. As an oil refining and marketing company with a long history, Neste is presumably better positioned to capitalize on the SAF opportunity than LanzaJet. Neste is a public company with an EV/S multiple of only approximately 1.
Gevo is a renewable chemical and advanced biofuel company that produces a range of fuels, including SAF. The company is targeting 55 million gallons of SAF production annually. Gevo’s market capitalization is currently around 230 million USD.
World Energy is another large biofuel supplier in North America. The company already commercially produces SAF and is aiming for 1 billion gallons of SAF production annually by 2030.
Financial Analysis
LanzaTech’s revenue in the third quarter of 2023 was 19.6 million USD, up 143% YoY. This increase was driven by engineering and other services revenue in the company’s biorefining business. CarbonSmart revenue also increased 34% YoY, although is still a relatively small contributor.
Figure 3: LanzaTech Revenue (source: Created by author using data from LanzaTech)
LanzaTech monetizes their technology through a combination of contract research, licensing (IP), royalties (ethanol sales) and sales (engineering services and materials).
Figure 4: LanzaTech Revenue Mix (source: LanzaTech)
LanzaTech’s growth is expected to remain robust in coming years, which is supported by the size of the company’s pipeline and ongoing ability to attract new partners. Much of this is already priced into the stock, though, as it will be 2025/2026 before LanzaTech begins to trade on a more reasonable revenue multiple.
Table 1: LanzaTech Analyst Revenue Estimates (source: Created by author using data from Seeking Alpha)
LanzaTech’s gross profit margin moved higher in the third quarter, with the improvement attributed to a shift in revenue mix. Presumably, LanzaTech’s gross profit margins will trend higher over time as royalties and licensing revenue build and the company scales. This hasn’t really been the case so far, though.
LanzaTech’s operating expenses totaled 29.8 million USD in the third quarter, driven by headcount growth to support the company’s expanding pipeline and R&D. LanzaTech’s losses are narrowing as the company scales, but the amount the company is still losing is somewhat concerning.
I am often ok with companies losing a large amount of money, as accounting statements often poorly reflect the reality of a business. This is really dependent on a company’s ability to realize economies of scale as prior investments in product development and customer acquisition begin to pay off.
This is obviously the case with LanzaTech to some extent, with upfront engineering work leading to royalties and licensing and consumable revenue. The company is also still investing in its waste product to molecule via fermentation technology. Given that the majority of revenue appears to be coming from services, with limited downstream revenue, I question the ongoing losses, though.
Breakeven probably occurs in 2026 assuming things go well, and I estimate that LanzaTech will need around 200 million USD cash to reach this point. The company only has around 137 million USD cash on hand, though, meaning a modest capital raise will likely be needed. Given LanzaTech’s market capitalization and lack of debt on the balance sheet, this shouldn’t be a major issue.
Figure 5: LanzaTech Operating Profit Margin (source: Created by author using data from LanzaTech)
Conclusion
While LanzaTech has interesting technology, it is competing against production from mature sources that are efficient and low-cost. LanzaTech is not producing commodity chemicals itself, but demand for its technology is dependent on cost parity with existing production methods. There is little clarity on production costs at the moment, but continued progression of projects through LanzaTech’s pipeline would seem to suggest that commercial plants are viable.
LanzaTech has multiple revenue streams that vary significantly in quality. Fees related to R&D and engineering services are likely to have relatively low margins and are non-recurring in nature. As a result, these sources of revenue do not warrant a high multiple, even if they are scaling rapidly.
Recurring revenues come from royalties, microbe and media sales and software licensing. Licensing and royalties are likely to have better margins and are more recurring in nature, creating more value for LanzaTech shareholders. Unfortunately, the majority of revenue currently comes from engineering services. This makes me skeptical of LanzaTech’s current valuation, even when accounting for the company’s cash balance and the value of the stake in LanzaJet.
Figure 6: LanzaTech EV/S Multiple (source: Seeking Alpha)
