Clarus: U.S. Biodiesel Tax Credit Extension Underway
The markets are tough for small caps, and particularly so for new IPOs, as we’ve seen in the trading of Biox (BX:TSX) — a Wellington Financial Fund III portfolio company. Biox runs a 67 million litre bio-diesel plant in Hamilton, based upon a patented process that doesn’t involve the food-for-fuel debate; it was also backed by Birch Hill Equity Partners, VentureLink and Wheaton. The news is not all bad however, as the U.S. Congress has passed some important legislation that speaks to the ongoing importance of bio-diesel.
A Canadian law that comes into effect in 2011 requires 10 per cent bio-diesel be blended into petroleum diesel. That will require about 600 million litres of bio-diesel, as compared to the 120 million currently being produced (see prior post “‘Renewable energy push from oil spill’” May 31-10).
Here’s a note from Clarus Securities on Biox from yesterday:
The U.S. House of Representatives has recently passed the legislation to extend a $1/gallon biodiesel tax credit that expired on December 31, 2009. The May 28th vote was part of the “American Jobs and Closing Tax Loopholes Act” that would keep the biodiesel tax credit in place until the end of CY2010. In addition, the credit is to be made retroactive so that any biodiesel blended in CY2010 would be eligible for the credit.
We understand the legislation is expected to be approved by the U.S. Senate over the next two weeks before it is signed into law by the White House. According to Senate representatives, the tax extension is favoured in the Senate and as such we expect the incentive to be approved in the near future. The United States’ Renewable Fuel Standard Program is set to commence on July 1, 2010. In February 2010 the US Environmental Protection Act issued final rules to implement the Renewable Fuel Standard (RFS2) that requires specific volumes of renewable fuel content equating to 2 – 3% of diesel by 2012. We expect these mandates to increase demand ten-fold.
In our view, the enforcement of the mandates and reinstatement of the credit will make biodiesel economics attractive for producers. We continue to believe BIOX’s production process has a considerable cost advantage as current technologies have limited flexibility in feedstock processing. We reiterate our BUY recommendation and $2.50 per share target price.
MRM
(disclosure – Fund III owns shares and warrants in BX)
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