The Cosan Group (CZZ) recently inaugurated its first sugar and ethanol plant in the city of Caarapó , situated in the State of Mato Grosso do Sul. The plant, with a processing and crushing capacity of approximately 2.5 million tons of sugarcane, will produce around 90 million liters of ethanol and 185,000 tons of sugar per harvest.
The Group invested roughly R$530 million on the mill, with about R$275 million financed by BNDES (Banco Nacional de Desenvolvimento Econômico e Social), Brazil’s state-owned development bank.
In addition to the production of sugar and ethanol, the plant will also create electric power from sugarcane bagasse. With an installed annual capacity of 76 MW, the plant is already contracted to sell 143,000 MWh a year; and has the potential to create nearly 2,100 job opportunities in the city.
The mill has an easy access to domestic consumer market, railway and ports as a means of transport, facilitating exports. Also, roughly 80% of sugarcane supply will be harvested mechanically.
We believe Cosan Limited is comfortably positioned for growth with an expected increase in sugar and ethanol production, driven by favorable weather conditions (higher level of rains) and higher yield of sucrose in the cane. Moreover, Cosan’s joint venture with Shell (RDS.A) is expected to create a better access to the ethanol consumer market, enhanced competitiveness in biofuels and fuel distribution businesses, improved debt ratios through more capital and rise in cash profile, and superior growth prospects.
However, the company is greatly exposed to the volatility in domestic and international supply and demand. Ethanol pricing is largely affected by changes in supply and demand for gasoline, while highly regulated market and speculation risks influence sugar prices. Besides, customer concentration risks and sensitiveness to currency fluctuations impact the company’s financial results in adverse conditions.
We currently maintain our Neutral recommendation on Cosan, supported by the Zacks #3 Rank (Hold).
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