ICL - Evogene's Subsidiary Casterra: $11.3M Sale Of Castor Plant Seeds May Be Tip Of Iceberg

2023-07-06 03:01:30 ET

Summary

• Evogene's wholly-owned subsidiary Casterra Ag has received initial purchase orders worth $11.3 million for its proprietary castor plant seeds, which will be used for biofuel production in Africa.
• The orders come earlier than expected, as Evogene's CEO previously anticipated seed sales to begin in 2024.
• Castor oil is increasingly seen as a green biofuel in Europe, with EU regulations requiring 14% of transportation fuels to be biofuels by 2030.
• The $11.3 million purchase orders may be the tip of the iceberg for Casterra.

On July 3, Evogene Ltd.'s (EVGN) wholly-owned subsidiary Casterra Ag, Ltd. ("Casterra") announced it received its second purchase order for $2.2 million for its genomically superior castor plant seeds. This was Casterra's second material castor seed order announced in less than two weeks. Its initial $9.1 million order was announced on June 21. Delivery of the castor seeds (totalling $11.3 million) is expected during 2023. These announcements have caused Evogene's share price to increase by more than 50% in the past couple of weeks.

For those new to the Casterra story:

Casterra is engaged in developing and commercializing high-yielding castor bean seeds as a cost-competitive, sustainable, second-generation feedstock for the growing biofuel market. It has built its castor genetic assets based on a broad collection of over 300 castor lines from over 40 different geographic and climatic regions. As part of its development process, Casterra applies advanced breeding methods utilizing Evogene's Generator AI tech engine, enabling the use of cutting-edge plant genomics tools and agro-technique expertise to enable efficient and sustainable industrial-scale production of the castor bean..."

These purchase orders follow Casterra's earlier January 19, 2023 press release announcing it had signed a framework agreement with an undisclosed "leading energy" company to provide "... its unique castor varieties and its broad know-how in the cultivation of castor at a commercial scale for biofuel production..." in specific African territories.

The second purchase order set out in the July 3 press release reflects Casterra's reach to new African territories.

These purchase orders totalling $11.3 million, have already exceeded my expectations. I had expected Casterra to generate little or no sales revenue in 2023. In fact, during its May 18th earnings call, Evogene's CEO Ofer Haviv only discussed anticipated sales of a few hundred tons of castor seeds per year of Casterra castor plant seed sales as of 2024.

These purchase orders confirm my bullish thesis on Casterra's ability to sell its proprietary best-in-class castor seeds as well as proprietary mechanical castor plant harvesting solutions described in detail in my February 21, 2023 article, Evogene Subsidiary Casterra Ag: Castor Seeds Benefiting from Changes in EU Laws.

As described in my February article:

...Castor oil is produced from castor oil plant beans ( Ricinus communis) which are non-edible. Unlike other edible oil plants such as palm oil and soybean oil, Castor oil plants can be grown in non-arable lands in very difficult conditions, including lands that were otherwise abandoned. The idea is that the production of castor oil plants could be grown on previously non-arable lands which would enable the recovery of natural habitats where, for example, palm oil was previously cultivated.

As well, Castor oil is renewable, biodegradable, has low toxicity, contains negligible sulphur content and generally generates clean exhaust emissions. The European Union considers "castor oil" as a green fuel suitable as a biofuel or biodiesel satisfying European regulatory requirements. ..."

When I recently emailed Casterra's CEO, Eyal Ronen, he advised that the revenues from these purchase orders would be accounted for in 2023. Note that Mr. Ronen is also the Executive Vice-President of Business Development at Evogene.

I had a brief follow-up call with Mr. Ronen on July 4th.

Margins: When I asked about the anticipated margins for these seeds, Mr. Ronen declined to answer but did suggest that the margins for genomically superior seeds were typically on the high side.

Casterra's castor seeds were developed using Evogene's computational GeneRator AI and ChemPass AI platforms, proprietary germplasm data and "unparalleled genetics knowledge," resulting in Casterra's development of best-in-class high-yield castor seeds, which can generate 4 to 6 times higher yield than wild type castor plants and generate 50% castor oil yields compared to natural varieties generating 30% to 40%, and do so under difficult growing conditions. Casterra's castor plant seeds have been genomically developed, utilizing genetic tools, and improved by Casterra over a period of years to improve plant and oil yield and growth characteristics.

Pipeline and R&D:

Casterra continues to develop new varieties of castor plants (now working on its third-generation castor plants), with the potential to develop castor plants with higher yields, greater hardiness and more specialized types of oil.

In discussing Casterra's potential other development plans, Mr. Ronen discussed Casterra's ability to use Evogene's leading-edge CRISPR and/or RNAi technology , to genomically modify castor plants in order to produce specific characteristics, such as castor oil with more suitable characteristics for the aviation market versus the automobile industry, and even potentially developing a castor plant, which may be suitable for animal feed.

Ronen explained that Casterra might be able to produce a castor plant without ricin, which is toxic, which would then allow the use of the protein part of the castor plant, which is the cake left after crushing, for use as animal feed. If this could be accomplished, it would provide a higher value to the castor plant growers as the cake may contain up to 50% protein content.

Casterra's pipeline and portfolio of castor seed products are summarized in the chart below. (Source: Casterra's May 2023 corporate presentation ).

Demand for Castor Oil in Europe as a Green Biofuel

As set out in my February 21 article, castor oil is classified in Europe as a "green" biofuel or biodiesel feedstock, which can be used to produce diesel fuel to reduce reliance on fossil fuels.

EU regulations now require all bio-feedstock to be certified as Low ILUC ( I ndirect L and U se C hange) Crops; either demonstrating yield increase (improved seeds, cover crops) or by land recovery (ability to grow the crop in unused or abandoned land.) Casterra's castor bean seeds can be certified as producing a Low ILUC Crop.

New European Union Regulations: 14% Biofuels in European Transportation Fuels by 2030/ Palm Oil Being Banned

EU regulations require 7% to 10% of transportation fuels, including diesel, to include biofuels, increasing to 14% by 2030.

Until recently, most European biodiesel feedstocks came from palm oil, soyabean oil and other edible oils, but newly passed laws in Europe, being phased in from 2023 to 2030, ban the import of palm oil and other products linked to deforestation.

Banning the importation or use of palm oil as a biofuel in Europe has made castor oil an attractive alternative to oil and gas companies supplying the European market.

Large European energy companies, such as Eni S.p.A. (E), are aggressively expanding castor oil plant production, particularly in Africa, for use as a biofuel in Europe.

By way of illustration, ENI's website describes its rapid growth in castor oil production in Kenya and the Congo, which ENI describes as providing income to approximately 5,000 African families in 2023 and increasing to an expected 100,000 families by 2030.

More specifically, quoting from ENI's website :

... Besides Kenya, we are focusing on castor oil production in the Republic of Congo", says Mirko Araldi , Managing Director of Eni in Congo. "After signing a Memorandum of Understanding with the Republic of Congo last October, we immediately started a pilot phase in the departments of Niari, Pool, Bouenza and Kouilou, which allowed us to lay out a business plan according to which production will start as early as next year. We are starting to build the first agri-hub in Loudima, in the department of Bouenza, with a yield of 30,000 tonnes of vegetable oil per year. It will be a seed-to-oil processing plant, but also a multifunctional centre where local farmers can receive training and technical support. We will continue building more agri-hubs and from 2025 we expect to reach a production of 170,000 tonnes/year in 2026 and 200,000 tonnes/year by 2030, delivering significant economic and social developments for rural communities. Expected impacts include income generation for more than 5,000 households in 2023, rising to 100,000 by 2030. It is a great opportunity for the development and diversification of the country's economy."

The Superiority of Casterra's Variety of Castor Bean (Ricinus communis) Seeds

As detailed in my February 21 article, according to Mr. Ronen, over 80% of the castor oil plants are grown in India, with approximately 95% of the castor seed genetics coming from India, which, according to Mr. Ronen, are characterized by a lack of uniformity, with no specific genetics being dominant.

Until recently, castor oil plants have been grown in small family plots in India, Brazil, Kenya and the Congo, producing relatively low castor bean and oil yields, which were inefficiently grown and harvested.

Back in February, Ronen explained to me that traditional castor oil plants (grown from Indian sourced seeds) are typically tall, grown plantation style and have low grain yields: 500 kg/Hectare or Ha (approximately 2.2 acres) in non-irrigated soils and 700 kg/Ha in irrigated soils with less than 50% oil content, generating 250 kg to 350 kg of castor oil per Hectare.

In contrast, Casterra's proprietary variety of castor oil seeds has been created utilizing genetic tools to produce castor oil plants which are smaller, with a denser architecture, shorter growth cycle and much higher yield of 2,000 kg to 3,000 (or higher) per hectare per cycle, generating 1,000 to 1,500 kg of castor oil, with the potential to increase the number of castor bean crop plant/harvest cycles each year from two to three.

The summary of characteristics of Casterra's castor seed varieties (EVF712, EVF701, and EVF716) are summarized in Casterra's slides below.

In fact, Ronen indicated that in remarkably optimized conditions, he has seen reports of Casterra's castor bean seeds producing 5,000 kg of castor beans per hectare yields generating approximately 2,500 kg of oil per hectare (per growing cycle).

According to Ronen, the current market price for unrefined castor oil is approximately $1,800 US to $2,200 US FOB India ports per metric ton. Refined castor oil can sell at prices up to 5 to 7 higher (although about 10% of the volume is lost in the refining process).

For castor bean farmers and oil and gas company end users, using Casterra's variety of higher-yield castor seeds can materially improve yields and economic returns in growing castor oil plants, particularly if they are able to mechanize the growing and harvesting process (which Casterra has also developed).

Castor oil plants' ability to be grown in sub-optimal soils, and in drought conditions, in lands that might otherwise be considered non-arable or abandoned lands is an enormous benefit to the farmers.

Just the Tip of the Iceberg

In a news article published in the Times of Israel on June 21, Eyal Ronen is quoted as saying,

...The deal we announced is just the tip of the iceberg [emphasis added] . ... We signed a frame agreement for the coming years, meaning that the numbers in terms of the size of orders in dollar terms are expected to be doubled next year and reach even four times the current deal over the next five years."

If Ronen is correct, and the second $2.2 million order announced July 3 provides some credibility, Casterra's sales of its variety of superior castor plant seeds (which I expect will generate high margins) could generate U.S. tens of millions of dollars per annum in the coming years.

Casterra is positioning itself as a leader in the castor plant field, providing a full value chain from castor plant seed development to harvesting, utilizing Casterra's proprietary harvesting and dehulling equipment. According to Ronen, this has caught the attention of potential strategic investors who are observing Casterra's developments carefully.

Mr. Ronen believes that while potential competition exists, Casterra has a significant multi-year head start in developing superior and genomically specialized castor seeds and plants with vastly superior growth and yield characteristics attracting premium pricing.

The castor oil market has almost overnight become a high-growth space due to changes in EU regulations relating to biofuels, with demand increasing rapidly, particularly between 2023 and 2030.

The market for superior castor plant seeds alone could reach or exceed $1 billion by 2030 (assuming a few million hectares of castor plants are being cultivated by 2030). Casterra is positioned as a best-in-class leader in castor seed/plant genomics and harvesting solutions.

Mr. Ronen was optimistic that Casterra's sales growth and R&D plans would dramatically expand in the next few years (funded partly by major strategic partner investments, which he hoped to obtain). No assurances or guidance were given that such strategic investments would occur. I took these as aspirational comments. He speculated that Casterra might also do its own IPO in about three years' time.

Evogene Ltd. Corporate Summary

Evogene's AI-driven computational predictive biology platforms (ChemPast AI, GeneRator AI and MicroBoost AI) have turned Evogene into a life science hub which, in addition to an internal seed division, has created five potentially valuable life science subsidiaries, including:

1. Biomica (microbiome therapeutics in human health). See also my March 22, 2022 article, Update on Evogene's Subsidiaries: Biomica, Lavie Bio and Ag Plenus ;
2. Lavie Bio (Ag-biologicals including bio-stimulants and bio-pesticides), with minority interest owned ag-tech multi-national Corteva Inc. ( CTVA ) and ICL ( ICL );
3. AgPlenus (next-generation Ag Chemicals including herbicides, insecticides and fungicides);
4. Canonic (medical cannabis); and
5. Casterra Ag, Ltd. (proprietary castor oil seeds and related agricultural products).

Evogene's Shares outstanding: 41,616,303 common shares (Source: Form-20-F filed March 30, 2023)

Evogene's Share Price: $1.16 (close of market July 3, 2023)

Market Cap: Approximately $48 million

Share Price 52-week range: $0.55 to $1.30

See 1-year and 3-year Evogene share price charts below.

Cash or Equivalent: As of March 31, 2023, Evogene had $28.8 million in consolidated cash (not including $10 million received by its subsidiary Biomica in April 2023 from Shanghai Healthcare Capital). (Source: Transcript, May 18, 2023, Evogene earnings call ).

Bank Debt: none

Cash Burn/Usage: As stated in its May 18, 2023 earnings call , during Q1 2023, Evogene's consolidated net cash usage was approximately $6.6 million, or approximately $5.1 million, excluding Lavie Bio. The expected 2023 consolidated cash burn rate excluding subsidiaries Biomica and Lavie Bio usage, is between $12 - $14 million. The foregoing does not consider the anticipated 2023 net profit from the recently announced Casterra purchase orders.

Self-Funding Subsidiaries: Evogene's subsidiaries, Biomica and Lavie Bio are currently self-funding and no longer require financial support from Evogene. (Source: Evogene's May 18th earnings call transcript )

Evogene's Mid-Term Target: Each subsidiary to be financially independent while Evogene plays a significant role in maintaining and building its tech engines, "providing the subsidiaries' competitive advantage." (Source: Evogene's May 18th earnings call transcript)

Evogene's Long-term Plan "...is to realize value by spinning out or IPOing one or more of our subsidiaries, depending on the market and other conditions and subject to SEC and other rules regarding any such transaction...." (Source: Evogene's May 18th earnings call transcript).

NASDAQ Share Price Compliance: As shown in the 1-year share price chart above, Evogene's shares have been trading for less than $1.00 since about September 2022 until recently. Evogene had been notified that it was in breach of Nasdaq rules and given until October 30, 2023 (after a 6-month extension) to regain compliance (by either trading at $1.00 or higher for ten consecutive business days or by undergoing a reverse split.) Following the recent Casterra announcements, Evogene's shares are currently trading above $1.00. I anticipate that Evogene will regain compliance when this article is published or within days thereafter.

Evogene/Casterra Summary

Evogene's wholly-owned subsidiary Casterra is the beneficiary of changes under EU regulations relating to biofuels in transportation fuel, including banning palm oil and soybean oils. Casterra's development of a full castor value chain from the production of genomically superior castor plant seed development (including ongoing genomic developments to create specialized castor plant/ castor oil traits) to castor plant harvesting and dehulling.

Casterra's castor plant seeds are developed using Evogene's GeneRator AI technology to produce superior castor oil plants generating substantially higher plant and oil yields in lands that may be otherwise non-arable or abandoned. Casterra's castor plant seeds are years ahead of any real competition.

Casterra's recently announced $11.3 million purchase orders for its castor bean seeds in 2023 exceeded my expectations and supports my bullish thesis on Casterra, as initially set out in my February 21, 2023 article on Casterra.

Based upon Casterra's CEO's comments in the June 21, 2023, Times of Israel interview, Casterra's sales of its castor plant seeds will likely accelerate in the coming years. These recent $11.3 million purchase orders are the tip of the iceberg. Casterra's revenues are expected to accelerate in 2024 and beyond.

Given the genomic superiority of Casterra's seeds, I expect the margins to be high. Investors, however, likely won't have greater insights into those margins until revenues are reported in Q3 and Q4 earnings.

While Casterra has not provided revenue guidance or estimated profit margins, the recently announced $11.3 million purchase orders help validate the potential for Casterra to generate multiple tens of millions of dollars in annual castor seed sales in the coming years.

With the European Union regulatory tailwinds at its back and its best-in-class castor bean seeds finding a significant market, Casterra has the potential to significantly contribute and likely exceed the value of its parent company Evogene which currently has a market cap of only $48 million.

As of March 31, Evogene had cash in excess of $28 million (not including the $10 million received by its subsidiary Biomica in April), no bank debt, and the value of its ownership in its five subsidiary life science companies (Biomica, AgPlenus, Lavie Bio, Canonic and Casterra).

Evogene's expected 2023 consolidated cash burn rate excluding subsidiaries Biomica and Lavie Bio usage, is between $12 - $14 million. Biomica and Lavie Bio are currently self-funding. The foregoing does not consider the anticipated 2023 net profit from the recently announced Casterra purchase orders later this year.

Evogene's goal is that each subsidiary is financially independent and that one or more of its subsidiaries will be spun out or do an IPO in the future, depending on the market and other conditions.

Besides the $11.3 million in anticipated Casterra revenues in 2023, Evogene's subsidiaries Canonic and Lavie Bio are generating limited revenues in 2023. Investors will receive additional clarity on those sales revenues in the coming quarters.

Evogene: Investment Risks

Evogene and its five subsidiaries remain early stage, and revenues remain relatively small, notwithstanding Casterra's very promising $11.3 million in recently announced purchase orders.

Evogene continues to burn cash and may need to raise additional capital, causing further dilution in the future.

Evogene's share price has been highly volatile over the past three years, making an investment in Evogene more suitable for investors with a high-risk tolerance.

There is no assurance that Casterra will succeed or gain a material amount of castor seed market share, despite the recently announced $11.3 million castor plant seeds sale being promising. While Casterra appears to have a multi-year competitive advantage, there is no assurance that its competitive edge will continue for a significant period of time.

There is no assurance that castor oil will continue to be a favoured feedstock for biofuels or biodiesel in Europe or elsewhere or that other regulatory or legal changes could make castor oil less desirable as a biofuel.

Before investing in Evogene, you should conduct your own due diligence and/or obtain professional advice to determine whether it is an appropriate investment for you and the sizing of such an investment.

For further details of the potential risks involved in investing in Evogene, see the risk factors set out in Evogene's most recent public SEC filings available on the Company's website and on EDGAR.

For further details see: