Shares digital

Feedstock producer GEM BioFuels (GBF:AIM) has distanced itself from problems depressing the European biofuels industry, which is being undercut by cheap US imports. The company insists its focus on the Asian market isolates the business from the price war, as there are no tax incentives in its end market similar to those currently encouraging US manufacturers to flood Europe with a product containing 1% traditional diesel.

D1 Oils (DOO:AIM) said earlier this month that heavily subsidised biodiesel fuel from the US, so-called B99, had eroded margins so much that jobs would have to be cut, prompting the resignation of founder Karl Watkin. British chancellor Alistair Darling announced two weeks ago that the UK would scrap tax breaks for biofuel from 2010. US fuel producers meanwhile are taking advantage of double tax-break rules, where they are given a credit for making fuel that contains a minimum 1% of biodiesel. A similar tax incentive is then awarded in Europe for supplying so-called ‘environmentally-friendly’ fuel.

The European Biodiesel Board warned five months ago that unless the US clamped down on the ‘splash and dash’ loophole, where foreign producers were shipping their commodities to the US to add 1% diesel before shipping to Europe, the EU biodiesel industry would take legal action.

In Madagascar, GEM BioFuels is growing jatropha shrubs that produce a crude oil as feedstock for biofuel. It has agreed to sell 55% of the first five years’ production from 2009 to a biodiesel facility in Singapore. ‘The US imports to Europe are a finished product, but we’re selling just the feedstock to make biofuel,’ said chief executive Paul Benetti. ‘Singapore is becoming a regional hub for the renewable fuel industry, so it’s hard to see the US producers being able to disrupt the market in the same way as they’ve done in Europe.’

The shares of GEM BioFuels have fallen 35% to 39p since its October 2007 IPO. The company was late to plant seeds, which meant it fell around 40% short of the 50,000-hectare target in the admission document. Benetti blamed the reduction in planting on the time it took to collect seeds, adding that the business remained on track to plant 200,000 hectares by the end of 2010. Planting can only be done in Madagascar’s rainy season, typically between November and February. The shrubs need at least two years’ growth before harvesting can begin, also limited to a three-month annual window starting each April.

The company has secured the rights to plant over 490,000 hectares of land in Madagascar. It is also seeking to acquire land in other countries including East Africa, Central and South America.

GEM BioFuels has £2 million cash left from its IPO fundraising, which will support the first 200,000 hectares development. Investment bank Matrix estimates that the business will become profitable in 2010, making a net $2.8 million, rising to $25 million by 2016.

Shares says: A simple business model but lacking immediate scale. Long-term investors may want to sit on the shares but not one for traders seeking quick money.