A few bugs at Minnesota biofuel plant

Shares of Minnesota biofuel producer Gevo Inc. dropped 35 percent Tuesday after the company backpedaled on plans for commercial production of a higher-value alcohol called isobutanol.

Gevo said it would resume ethanol production at its sole plant in Luverne, Minn., while its scientists work out bugs in its proprietary technology for the new biofuel, which went into production in May after a $40 million plant retrofit.

"Our throughput -- the rate of production -- is not on a track I like," Gevo CEO Patrick Gruber told analysts in a late Monday conference call. "The good news is we know what we need to do."

The Luverne plant is the world's first commercial-scale effort to produce isobutanol from renewable sources. Isobutanol is an alcohol that can be added to gasoline like ethanol, turned into specialty chemicals to make various other products, and used as a jet or marine fuel.

Gruber didn't offer details on the problem, citing proprietary reasons, but indicated that the culprit is literally a bug. In an apparent reference to the yeast used to ferment isobutanol, he said there are "tweaks we can make in our bugs to fix it."

But the plant, with its giant fermentation tanks, is the wrong place to solve the problem, he said. It makes more sense to earn money producing ethanol in Luverne while the problem is addressed, he added. Both processes rely on fermenting corn.

Two investment banks immediately downgraded the company's stock to neutral, and shares fell to their lowest point since Gevo's February 2011 initial public offering.

When Gevo retrofitted the plant, it left the ethanol-making capability intact. Yet it planned to produce only isobutanol, ramping up to 1 million gallons per month by the end of December. Now, the company says that plan will be delayed until an unspecified point in 2013.

Not all analysts were rattled by Gevo's announcement.

"This news is obviously unwelcome, but it's not particularly surprising," Raymond James analyst Pavel Mochanov said in a research note Tuesday. "Scale-up of industrial biotech -- including, but certainly not limited to, Gevo's fermentation platform -- almost always entails a longer-than-expected process of optimization before production rates reach target levels."

He still rates the stock "outperform." So does Robert W. Baird & Co. analyst Ben Kallo, who noted that "this is a first-of-a-kind commercial-scale facility." Ramp-up challenges were anticipated, Kallo wrote Tuesday, "and we are encouraged that management seems to have a roadmap in place to get production back on track."

Gevo, based in Englewood, Colo., will re-enter the ethanol market at a time of low margins due partly to higher corn prices stemming from the drought. In the Star Tribune's second-quarter survey of seven Minnesota-affiliated ethanol companies, all reported net losses.