Latest / WTR Small-Cap Spotlight / LanzaTech (LNZA): Waste Carbon to Ethanol, SAF and Marine Fuel Demand, and Embedded Value

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LanzaTech (LNZA): Waste Carbon to Ethanol, SAF and Marine Fuel Demand, and Embedded Value · WTR Small-Cap Spotlight

• 0:00
  SPEAKER_00: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_00: I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research.
• 0:11
  SPEAKER_00: In today's podcast episode, I'm joined by Dr.
• 0:14
  SPEAKER_00: Jennifer Holmgren, CEO of Lanzatech Global NASDAQ Ticker Symbol, LNZA.
• 0:20
  SPEAKER_00: Lanzatec's proprietary biofermentation technology transforms industrial emissions, carbon dioxide, and gasified waste into ethanol as a building block for a wide range of sustainable products, including sustainable aviation fuel, also known as SAF, marine fuel, and other critical chemical derivatives.
• 0:40
  SPEAKER_00: Also joining is my WTR equity research colleague, Peter Gastrike.
• 0:44
  SPEAKER_00: Good morning, Jennifer and Peter, and thank you for joining today's podcast.
• 0:48
  SPEAKER_02: It's really a pleasure to be here with you.
• 0:51
  SPEAKER_00: Good morning.
• 0:53
  SPEAKER_00: Jennifer, to kick things off, for listeners who may not know the company quite as well, would you provide us with a high-level overview of the company and its technology and perhaps share just a bit about your own professional background as well, please?
• 1:06
  SPEAKER_02: Absolutely.
• 1:08
  SPEAKER_02: What the company does is it converts waste gas streams to ethanol.
• 1:15
  SPEAKER_02: That ethanol has been used already to make sustainable aviation fuel.
• 1:19
  SPEAKER_02: It can be used for as a marine fuel, and it can also be used to make materials.
• 1:24
  SPEAKER_02: If you go to REI, you can buy a jacket made with recycled carbon emissions.
• 1:52
  SPEAKER_00: Rather relevant background to your current role.
• 1:54
  SPEAKER_00: So thank you for that.
• 1:55
  SPEAKER_00: And with that, I'll turn it over to Peter.
• 1:58
  SPEAKER_01: Hey, thanks, Tim.
• 1:59
  SPEAKER_01: So yeah, as Jennifer, uh Jennifer, as Tim mentioned, uh, you know, we will have some listeners today who are new to the Lanzatech story.
• 2:06
  SPEAKER_01: Uh, and within those, probably, you know, some generalists uh investors as well.
• 2:09
  SPEAKER_01: So, you know, keeping that in mind, could you extend a bit further to explain uh you know Lanzatech's technology, perhaps more in you know, layman's terms, and you know, how is it that you turn waste carbon into ethanol and what sets your technology uh and the process you know apart from uh what other approaches that are in the market?
• 2:29
  SPEAKER_02: So usually, well, we all drink ethanol or at least know of ethanol in wine and beer, right?
• 2:36
  SPEAKER_02: At the end of the day, that is all made through the fermentation of sugars or carbohydrates.
• 2:42
  SPEAKER_02: And we do a fermentation also, but instead of using sugar, we use what would be a carbon emission.
• 2:50
  SPEAKER_02: So at an industrial site like a steel mill, instead of then emitting their carbon waste, we capture it, pump it into our bioreactor, and convert that to ethanol.
• 3:01
  SPEAKER_02: So it's just like a normal fermentation.
• 3:04
  SPEAKER_02: Now, one of the really exciting parts is that this fermentation is done in a continuous process.
• 3:11
  SPEAKER_02: And I know that sounds technical, but when you make beer or wine, you put the sugar and the yeast and you go away for months, right, to make your product.
• 3:19
  SPEAKER_02: Here it's continuous.
• 3:21
  SPEAKER_02: You add gas at the top, then you get ethanol at the bottom, and away you go in a very fast cycle.
• 3:27
  SPEAKER_02: That makes it more like a refinery.
• 3:30
  SPEAKER_02: And as you know, today, most of our materials and fuels and power comes from refineries.
• 3:38
  SPEAKER_01: And so your end product uh you know focus has really evolved.
• 3:43
  SPEAKER_01: Uh, and you now look at multiple end markets uh, but still addressed from the same platform, right?
• 3:48
  SPEAKER_01: So you know let's put uh marine fuels and aviation fuel side by side here.
• 3:54
  SPEAKER_01: Um, how would you compare those opportunities and what is driving demand for low-carbon ethanol in each of those?
• 4:01
  SPEAKER_02: So the both of these are mandated markets, right?
• 4:05
  SPEAKER_02: So there is heavy pull from either government incentives or government requires that provide penalties if you do not blend sufficient sustainable aviation fuel or low-carbon marine fuel into your conventional fossil carbon fuel.
• 4:24
  SPEAKER_02: Uh these markets right now are expected to be two and a half trillion dollars.
• 4:30
  SPEAKER_02: If you want to think about it in scale instead of dollars, the world uses 100 billion gallons of aviation fuel every year.
• 4:40
  SPEAKER_02: Okay.
• 4:42
  SPEAKER_02: But the goal is by 2030 to have 10% of that, 10 billion gallons a year of sustainable aviation fuel.
• 4:50
  SPEAKER_02: Today, the world is not even producing a couple hundred million gallons a year of sustainable aviation fuel.
• 4:58
  SPEAKER_02: So we're 20% of the way to the 2030 target, which is literally four years away.
• 5:04
  SPEAKER_02: And so, really, it's a massive opportunity.
• 5:07
  SPEAKER_02: The marine sector is a little bit further behind in that their sustainability pool has started more recently.
• 5:16
  SPEAKER_02: However, it is catching up, and for us, the opportunity is to get to sustainable aviation fuel, you have to turn ethanol into a hydrocarbon, into another molecule.
• 5:26
  SPEAKER_02: To get into the marine market, you just drop in the ethanol.
• 5:30
  SPEAKER_02: So you don't need a second conversion step.
• 5:33
  SPEAKER_02: For us, that makes marine a near-term opportunity.
• 5:39
  SPEAKER_01: Yeah, and also would just add to that, what what we have seen is that the that demand is really going to be kicking up starting in 2030, but the supply looks like it is sort of lagging.
• 5:48
  SPEAKER_01: So we've kind of found that those companies that are going to be in position uh, you know, when that demand strikes are going to be, you know, uh uh very well positioned.
• 5:57
  SPEAKER_01: Yeah.
• 5:58
  SPEAKER_02: Yes, and that is why us having already existing production facilities that actually make this product from waste carbon, we have six commercially operating plants across the world.
• 6:11
  SPEAKER_02: So it's not a lack of being able to fill that.
• 6:15
  SPEAKER_02: I would also add one quick thing.
• 6:17
  SPEAKER_02: A lot of the European and the UK mandates do not want carbon coming from food feedstocks.
• 6:24
  SPEAKER_02: And so the fact that we use an industrial waste or a municipal waste or even an agri-waste actually is quite interesting because it puts us in a very unique position that we are completely outside what people would consider the food value chain and we're already producing.
• 6:42
  SPEAKER_01: And so that you know market opportunity that you outlined is clearly very large, uh, and that's exciting to look at.
• 6:49
  SPEAKER_01: And uh, but now let's turn to how you're going to capture value uh in these uh very large markets.
• 6:55
  SPEAKER_01: So you've talked about uh two ways to create value uh previously.
• 7:00
  SPEAKER_01: Uh first, you're licensing your technology, and second, you're developing projects uh yourselves also.
• 7:06
  SPEAKER_01: So, how should we think about those two approaches, sort of uh you know, working together?
• 7:11
  SPEAKER_02: No, that's a great question.
• 7:13
  SPEAKER_02: If you stop and think about what we're doing, is we're building refineries, right?
• 7:17
  SPEAKER_02: And it takes hundreds of millions of dollars to do that.
• 7:20
  SPEAKER_02: So we have to develop the platform technology and build refineries at the same time.
• 7:25
  SPEAKER_02: The best way to do that without a big balance sheet is to license the technology.
• 7:31
  SPEAKER_02: The upside, of course, is capital light.
• 7:33
  SPEAKER_02: The downside is your partner captures all the value because they made the big investment in the plant.
• 7:40
  SPEAKER_02: So, what we've started to do is transition to not just being a licensor, but also developing our own projects, getting them financed by partners and having access to the product ourselves so we can capture some of the upside volume and value of the markets that are there.
• 8:01
  SPEAKER_02: And the markets we frankly have been creating because nobody had ever heard of a recycled carbon fuel.
• 8:06
  SPEAKER_02: And so we've created the market and we haven't been able to leverage that to create big value, big margin for us.
• 8:15
  SPEAKER_01: And you know, turning over toward the regulatory side, so you know, you've mentioned mandates, and those have really uh stuck uh in the last one or two years, we've seen a lot of you know very positive momentum across the industry in terms of uh regulation.
• 8:29
  SPEAKER_01: Uh it's noteworthy that uh, you know, Lanzatech, you recently achieved this major certification in Europe for the ethanol produced at your China facility.
• 8:37
  SPEAKER_01: Um could you tell us uh you know what that means and how it changes things for uh Lanzatech going forward?
• 8:43
  SPEAKER_02: Absolutely.
• 8:44
  SPEAKER_02: We um we have been trying to get a seat at the table because the problem with legislation, it's usually based on technology that exists versus technology that's disruptive and being developed.
• 8:59
  SPEAKER_02: So recycled carbon fuel could not compete with um a food-based ethanol.
• 9:07
  SPEAKER_02: Now we have gotten in as a recycled carbon fuel, and ISEC has we're almost there, we don't actually have the certification, we should have it hopefully by the end of the month, have already audited our first China plant, and so we're hoping to get ISEC use certification.
• 9:26
  SPEAKER_02: What does that mean?
• 9:27
  SPEAKER_02: All of these mandated markets, marine, ground transport, and aviation in Europe and the UK will now recognize and be able to understand the carbon intensity and carbon impact of using our technology.
• 9:44
  SPEAKER_02: So our ethanol now will be able to go into higher value markets before we could only sell it where it was possible, China and other places, but not in the European market, which commands a higher value.
• 9:58
  SPEAKER_02: So this is going to make a big, big difference for us.
• 10:03
  SPEAKER_02: And once you get accepted in something like EU and the UK, you kind of get a stamp of approval and people start to think about how do you think about this product?
• 10:13
  SPEAKER_02: What does it mean?
• 10:14
  SPEAKER_02: What could it do for me?
• 10:16
  SPEAKER_02: And so we hope it opens up more markets.
• 10:20
  SPEAKER_01: I think one of the you know very interesting components of the Lanzatech story is really the embedded value looking beyond your core business.
• 10:28
  SPEAKER_01: So you built up valuable assets and partnerships, uh, including Lanzajet, which I think some listeners might be more familiar with.
• 10:36
  SPEAKER_01: And uh, you also have the you know Shugong Lanzatech joint venture, uh, Carbon Smart Ethanol, uh, quite a few things to unpack there.
• 10:44
  SPEAKER_01: But you know, how should investors think about the embedded value uh you know from these assets?
• 10:49
  SPEAKER_02: Yeah, I think I think we should think about it as a platform.
• 10:53
  SPEAKER_02: We developed a platform and we're now spitting out pieces that on their own have value.
• 10:59
  SPEAKER_02: We developed the ability to take ethanol to sustainable aviation fuel.
• 11:02
  SPEAKER_02: We formed Lansa Jet with partners like Shell, Suncor, Mitsui, and IAG to commercialize the technology to go fast and develop a new approach to make jet fuel.
• 11:15
  SPEAKER_02: The other thing that you can imagine also is we've done quite a bit of work in China, as you know, where our partner, our JV in China, because that's how we did our work in China, has already five actually now commercially operating plants.
• 11:31
  SPEAKER_02: They are their own company, have their own value.
• 11:35
  SPEAKER_02: And in fact, the IPO'd in the Hong Kong Stock Exchange in June, that company is worth$1.3 billion today, and it is based on our technology.
• 11:46
  SPEAKER_02: Every single plant that gets them revenue, that gets the margin, uses the Lancetech.
• 11:52
  SPEAKER_02: It's Lancetech inside, and so I want you to think about it that way.
• 11:58
  SPEAKER_02: Um, while we own 8.5% of that entity, which today is valued at over$100 million, what is really important is that's the first.
• 12:10
  SPEAKER_02: With our technology, we can replicate that model, we can work with others and create that value.
• 12:16
  SPEAKER_02: And so that that's how you should think about this a platform that is just beginning to show the value that it can create.
• 12:26
  SPEAKER_01: Well, that's a good uh segue to uh shift to your growth outlook, which is truly global.
• 12:31
  SPEAKER_01: Uh you have a number of projects uh you know moving through development, uh well, China, but we've got across the UK, Belgium, uh, the US, Norway, and India.
• 12:42
  SPEAKER_01: Um, how should investors think about the path to you know bringing these online and how you're also funding that growth?
• 12:50
  SPEAKER_02: So we have um in our commercial pipeline, we have some licensing projects across the world.
• 12:58
  SPEAKER_02: Uh, and for those, we work with our partner to get those built and up and running.
• 13:05
  SPEAKER_02: But we the project you mentioned in the UK, we call it Dragon.
• 13:09
  SPEAKER_02: It's an ethanol-to-saf commercial plant.
• 13:11
  SPEAKER_02: We're our own developers, and we will bring infrastructure funds to build that plant, and we will own a portion of it to capture additional value as we discussed earlier.
• 13:24
  SPEAKER_02: We have a partnership with Brookfield.
• 13:25
  SPEAKER_02: Brookfield committed more than$500 million of investment.
• 13:30
  SPEAKER_02: All we need to do is get projects to final investment decision.
• 13:35
  SPEAKER_02: Once we meet their investment criteria, then they will pick up that project, they will pay for our development work that we have done to date, and then they will pick up, construct, and start production.
• 13:49
  SPEAKER_02: And we will have access to some of that product.
• 13:52
  SPEAKER_02: So it's kind of a cross between a license and a build on and operate, but we won't own it ourselves.
• 13:59
  SPEAKER_01: So you've laid out a lot of you know strong evidence for how uh Lanzatech has been executing on its strategy to date.
• 14:06
  SPEAKER_01: Um, but so now if we start looking out, looking forward over, say, the next 12 to 18 months or whatever timeframe you think is uh relevant here, uh what are some of the key signposts or milestones that investors should be watching in order to uh track the company's progress?
• 14:22
  SPEAKER_02: Absolutely.
• 14:22
  SPEAKER_02: I would look one at the fact that we have um our first Brookfield project transferred over the next 12 months.
• 14:30
  SPEAKER_02: So that means we will show the business model where we develop a project, they pick it up and away they go with it, with our support, of course.
• 14:38
  SPEAKER_02: So that's one signpost.
• 14:39
  SPEAKER_02: The second is I'd like to see a commercial ethanol to staff project at commercial scale over the next 12 to 18 months.
• 14:49
  SPEAKER_02: I want to start construction on that.
• 14:51
  SPEAKER_02: We have the UK project, Belgium project.
• 14:53
  SPEAKER_02: We should be at FID with both of those next year.
• 14:56
  SPEAKER_02: So they should reach construction again within the 12 to 18 month horizon.
• 15:00
  SPEAKER_02: And then the last thing that I consider significant is marine.
• 15:06
  SPEAKER_02: I expect that over the next 18 months for sure, we will start to put our recycled carbon ethanol in ships and start to show that drop-in ethanol replacement on what used to be just methanol bunkering systems creates higher value.
• 15:24
  SPEAKER_02: And that is what we're going for.
• 15:26
  SPEAKER_02: So, really, those are critical milestones for us in our 18-month journey.
• 15:32
  SPEAKER_01: So, Jennifer, you know, thanks very much for your time today.
• 15:35
  SPEAKER_01: But before I pass over to Tim, uh, you know, we have covered quite a bit today, uh, but just want to see if there's anything that you can think of that we might have uh missed, uh, or would you like to leave any final thoughts for our uh investors listening today?
• 15:48
  SPEAKER_02: Well, I I think the key is that we've checked some very critical boxes over the past two years.
• 15:54
  SPEAKER_02: We've de-risked the technology, we're finally out of the headwinds that legislation that didn't include it had set before us, and the market is really opening up with SAF and Marine becoming important players.
• 16:08
  SPEAKER_02: So I really feel we are at a really great place in terms of our future, and we cleaned ourselves up.
• 16:16
  SPEAKER_02: We reduced our costs by over 65% relative to last year, and so we're actually streamlined, more commercially focused, more ready to really move fast.
• 16:30
  SPEAKER_01: Okay, well, great.
• 16:31
  SPEAKER_01: Jennifer, thank you so much for your time today.
• 16:34
  SPEAKER_01: I think investors will appreciate uh everything that you've unpacked for us.
• 16:38
  SPEAKER_01: Uh the market opportunity, your evolving uh you know, strategic direction, uh execution, uh, the embedded value uh in the business, including Shogong Lenzatech and others, uh, and the signposts you've you've outlined as well to watch uh you know going forward.
• 16:52
  SPEAKER_01: So with that in mind, uh, we would love to check at big check back in with you again in a future water type research uh event.
• 16:59
  SPEAKER_01: Uh but until then, you know, thank you very much.
• 17:02
  SPEAKER_02: Thank you so much, Peter.
• 17:04
  SPEAKER_00: Peter, thanks for the uh thoughtful yeah, thanks for the thoughtful questions.
• 17:08
  SPEAKER_00: Peter and Jennifer, thank you so much for giving us a uh updated overview on Lanzatech.
• 17:12
  SPEAKER_00: Very interesting story and uh best wishes.
• 17:15
  SPEAKER_02: Thank you so much.
• 17:17
  SPEAKER_00: Thank you for listening, and don't forget to subscribe, as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 17:33
  SPEAKER_00: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 17:38
  SPEAKER_00: Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.