Riding a green tide

August 3, 2009

PetroAlgae is one of those many clean-tech companies that seem to burn through cash faster than a Hummer goes through a gallon of gas. Yet something curious is going on with shares of this Melbourne, Florida-based company, which is hoping to make money from turning algae into oil.

Over the past month, the stock price of PetroAlgae has rocketed from $8 to as high as $32.75 on ultra-thin trading of the shares (as of late Monday it had fallen back to around $10).

PetroAlgae boasts a rather healthy $1 billion market value — after being as high as $3.4 billion earlier Monday — even though it has no revenues, a $34 million accumulated deficit and its auditor isn’t sure the company can continue as a going concern.

There may be a plausible explanation for PetroAlgae’s surprising surge. Last month, Exxon Mobil announced that it would spend $600 million to study the feasibility of algae-based fuels. There’s no indication PetroAlgae will get any of those research dollars, but that’s never stopped investors from wishing.

But the real winners here are David Grin and Eugene Grin, hedge fund managers who are longtime investors in cash-starved, small-cap companies. A group of funds managed by the brothers, including the $700 million Valens Capital Management series of hedge funds, effectively own a 96 percent equity stake in PetroAlgae.

The brothers Grin sank their teeth deep into PetroAlgae last December. In a series of transactions, a company controlled by Valens and the other funds paid $350,000 for 100 million shares of PetroAlgae, regulatory filings show. Then the Valens funds pumped an additional $10 million into PetroAlgae — a cash infusion that accounted for nearly all the assets on the biotech company’s balance sheet at the end of 2008.

Valens’ investment in PetroAlgae represents nearly a quarter of the hedge funds’ equity, say investors familiar with the fund. So the Valens funds, which were up a modest 4 percent in the first half of the year, should get a big bounce in July from the run-up in PetroAlgae shares.

Still, it’s hard to see how Valens investors will ever truly profit from an Exxon-induced green wave of enthusiasm for algae-based fuels.

With the Grins’ funds controlling all but a small sliver of PetroAlgae shares, the stock seldom trades. Any attempt by Valens and the other related hedge funds to try to take some profits by selling shares would quickly take the air out of this bubble.

And with PetroAlgae burning through $5.8 million in cash in the first quarter, about half the $10 million it received from Valens is gone. At the end of the first quarter, PetroAlgae reported having $5.6 million in assets. It had $11.6 million at the end of 2008. 

So it’s not clear what the Grins’ longtime game plan is for this tiny cash-hungry company. An attorney for the hedge funds had little to say except to note that the Grins provide “shareholders and auditors with complete transparency and updates on the PetroAlgae investment.”

Unless PetroAlgae can come to market soon with a viable technology for turning algae into fuel, it appears as if Valens investors may find themselves stranded on the rocks.

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