Algae.Tec Limited – Arrowhead BID 1 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report. Due Diligence and Valuation Report Arrowhead Code: 10-01-03 Coverage initiated: 23 March 2011 This document: 06-09-2011 Fair share value bracket: AU$1.51 to AU$ 2.15 i Share price on date: AU$0.33 ii Company: Algae.Tec Limited Ticker: ASX:AEB, OTCBB:ALGXY Headquarters: Perth, Australia Executive Chairman: Mr. Roger Sydney Stroud Website: www.algaetec.com.au Analyst Team Thomas Renaud Rashmi Shah [email protected]+1 (212) 619 6889 Market Data 52-Week Range: AU$0.17 to AU$0.67 iii Average Daily Volume: 32,496 iv Market Cap. on date: AU$81.81MM Financial Forecast Data (in AU$) ‘12E ‘13E ‘14E ‘15E 16E ‘17E ‘18E High profit/ (loss) MM (6.9) 27.2 58.6 59.2 60.3 61.6 63.0 High EPS AU$ (2.77) 10.99 23.63 23.87 24.33 24.86 25.39 Low profit/ (loss) MM (6.9) 17.9 39.0 39.4 40.2 41.1 42.1 Low EPS AU$ (2.77) 7.21 15.73 15.89 16.22 16.59 16.97 Fiscal Year (FY) 1 st July – 30 th June Summary Algae.Tec Limited is involved in the production of algae to manufacture sustainable fuels such as biodiesel and green jet fuel. Management has core competencies in biofuel technologies, energy markets, project commercialization and business management. The company has successfully demonstrated the algae oil and biomass yield in the experimental stages. The company is now building a demonstration facility with Malindra to prove its commercial viability, which is expected to be completed in Q1-2012. Algae.Tec is in the process of establishing strategic partnerships and alliances with investors, venture partners, customers and suppliers to accelerate achievement of the company’s goals and objectives. In addition, the company has recently set up the 18,200 square foot Algae Development & Manufacturing Centre in Atlanta where the photo-bioreactors will be assembled for shipping around the world. Algae.Tec tapped into international capital markets with a public offer and listed on the Australian Stock Exchange and Frankfurt Stock Exchange. On 28 th April 2011, the company’s American Depositary Receipts (ADR) commenced trading on the USA OTC market under the ticker ALGXY. Algae.Tec has developed the McConchie-Stroud System which cultivates and economically harvests high yield algae. The system is scalable, has minimal land footprint and water usage. The technology provides competitive advantages in terms of low capital and operating costs, minimal requirement of land, low water evaporation and better recycling of water amongst other specifics which make it commercially viable. The global market for algae is poised for explosive growth in the next 10 years, demand is expected to reach 61MM gallons/year of bio-fuel and a market value of AU$1.3B by 2020 representing a CAGR of 72%, roughly on par with early development in the biodiesel industry. Globally, the United States (US) is poised to ramp up production the earliest among world markets with 50% of all algae activity. The European Union, accounting for about 30% of algae activity, will be limited initially by the industry’s focus on university research, and later by insufficient access to water, land, and nutrient sources. It is believed that the US and Europe cannot grow enough corn, soy, or rapeseed to meet their bio- fuel targets. Latin America and Asia Pacific, which have fewer projects in operation today, are set to gain significant market share in the long run. Arrowhead believes that Algae.Tec has enormous growth potential with a medium risk profile. Based on intrinsic revenue capacity from 500 modules, Arrowhead believes that the company’s fair share value lies in the AU$1.51 to AU$2.15 bracket.
Transcript
Algae.Tec Limited – Arrowhead BID 1 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Due Diligence and Valuation Report
Arrowhead Code: 10-01-03 Coverage initiated: 23 March 2011 This document: 06-09-2011 Fair share value bracket: AU$1.51 to AU$ 2.15i Share price on date: AU$0.33ii
Company: Algae.Tec Limited
Ticker: ASX:AEB, OTCBB:ALGXY
Headquarters: Perth, Australia
Executive Chairman: Mr. Roger Sydney Stroud
Website: www.algaetec.com.au
Analyst Team Thomas Renaud Rashmi Shah [email protected] +1 (212) 619 6889
Market Data 52-Week Range: AU$0.17 to AU$0.67iii Average Daily Volume: 32,496iv Market Cap. on date: AU$81.81MM
Financial Forecast Data (in AU$) ‘12E ‘13E ‘14E ‘15E 16E ‘17E ‘18E High profit/ (loss) MM (6.9) 27.2 58.6 59.2 60.3 61.6 63.0
High EPS AU$ (2.77) 10.99 23.63 23.87 24.33 24.86 25.39
Summary Algae.Tec Limited is involved in the production of algae to manufacture sustainable fuels such as biodiesel and green jet fuel. Management has core competencies in biofuel technologies, energy markets, project commercialization and business management. The company has successfully demonstrated the algae oil and biomass yield in the experimental stages. The company is now building a demonstration facility with Malindra to prove its commercial viability, which is expected to be completed in Q1-2012.
Algae.Tec is in the process of establishing strategic partnerships and alliances with investors, venture partners, customers and suppliers to accelerate achievement of the company’s goals and objectives. In addition, the company has recently set up the 18,200 square foot Algae Development & Manufacturing Centre in Atlanta where the photo-bioreactors will be assembled for shipping around the world.
Algae.Tec tapped into international capital markets with a public offer and listed on the Australian Stock Exchange and Frankfurt Stock Exchange. On 28thApril 2011, the company’s American Depositary Receipts (ADR) commenced trading on the USA OTC market under the ticker ALGXY.
Algae.Tec has developed the McConchie-Stroud System which cultivates and economically harvests high yield algae. The system is scalable, has minimal land footprint and water usage. The technology provides competitive advantages in terms of low capital and operating costs, minimal requirement of land, low water evaporation and better recycling of water amongst other specifics which make it commercially viable.
The global market for algae is poised for explosive growth in the next 10 years, demand is expected to reach 61MM gallons/year of bio-fuel and a market value of AU$1.3B by 2020 representing a CAGR of 72%, roughly on par with early development in the biodiesel industry. Globally, the United States (US) is poised to ramp up production the earliest among world markets with 50% of all algae activity. The European Union, accounting for about 30% of algae activity, will be limited initially by the industry’s focus on university research, and later by insufficient access to water, land, and nutrient sources. It is believed that the US and Europe cannot grow enough corn, soy, or rapeseed to meet their bio-fuel targets. Latin America and Asia Pacific, which have fewer projects in operation today, are set to gain significant market share in the long run.
Arrowhead believes that Algae.Tec has enormous growth potential with a medium risk profile. Based on intrinsic revenue capacity from 500 modules, Arrowhead believes that the company’s fair share value lies in the AU$1.51 to AU$2.15 bracket.
Algae.Tec Limited – Arrowhead BID 2 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Algae.Tec Limited – Arrowhead BID 3 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Algae.Tec Presentation Algae.Tec is an Australian biofuel company focused on commercializing technology that produces algae to manufacture sustainable fuels such as bio diesel and green jet fuel. Founded in 2008, Algae.Tec has conducted scores of laboratory, bench-scale and pilot tests and product trials, assessed competitive algae technologies, and applied the results to detailed engineering evaluations of commercial plant operations. These activities have led to the development of unique proprietary technology and know-how for high efficiency production of microalgae via a novel modular photo-reactor system and improved algae harvesting and product refinement technologies.
The company’s unique technology has demonstrated sustained performance, providing step-change improvements in productivity, product yield, carbon dioxide sequestration, plant footprint requirements and substantial capital/cost savings versus agricultural crops and other competitive algae processes in the industry. The company is now building a demonstration facility with Malindra to prove its commercial viability, which is expected to be completed in Q1-2012.
Algae.Tec’s Asset Portfolio
Algae.Tec plans to construct modules that would cultivate Algae in efficient manner.
The most important application of algae technology is likely to be in the generation of biodiesel, which is registered and used as a direct diesel fuel substitute and fuel additive. Biodiesel provides important environmental advantages and has the highest “energy balance” of any transportation fuel. The total global in-place production capacity of biodiesel is 37B liters per year, with price driven by and dependent on crude oil, government subsidy and price of biodiesel feedstock.
It is estimated that algae produces more oil than any other oilseeds currently in use. For instance, where soybeans and sunflower yield 48 and 102 gallons of oil per acre year, microalgae’s could range from 5,000 to 15,000 gallons. The 125Mtpa vegetable oil market is set to witness a growth rate of 3%-5%.
After oil extraction, algae biomass could be used as feedstock, agricultural fertilizer, biomass power generation, etc. The animal feed market alone is an AU$80B per year market; the primary source high protein soybean meal is currently priced at approximately AU$450/T. The residual algae biomass with high carbohydrate and protein contents offers a direct substitute for agriculture-based protein sources.
Other key useful forms of algae are fatty acids, glycerine and ethanol – ingredients for the pharmaceutical and consumer industries.
For more detail on Assets, see the Assets and Projects section of this report.
Algae.Tec Limited – Arrowhead BID 4 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Algae.Tec’s Portfolio and Company Premiums
Advantages of Algae: Algae are a group of aquatic estuarine and marine plant organisms, which may range from microscopic (microalgae) to many meters in length. Largely found in damp places and bodies of water, approximately 1,000 algae species show the potential for production of biofuels. These organisms contain chlorophyll and with water, carbon dioxide and sunlight, produce complex carbon chain molecules such as hydrocarbons and polysaccharides and proteins.
Subject to each product’s composition, Algae’s carbon content could range anywhere between 45%-80%, in the form of lipids/oils, carbohydrates, proteins and hydrocarbons.
The advantages of algae, as a source of renewable fuel are noteworthy:
– Efficient and fast production cycle; converts solar energy and carbon dioxide into renewable and sustainable fuels.
– Effectively sequesters atmospheric carbon dioxide, balances greenhouse gas production and reduces impact of global warming.
– Provides environmental solutions for recovery of toxic stack gas pollutants and remediation of polluted water streams.
– Hydrocarbons derived from algae production can be used to produce renewable biofuels for direct substitution of fossil fuels.
– Algae-derived biofuels provide a significant reduction in vehicular exhaust emissions versus standard fossil fuels.
Technology - McConchie-Stroud System
Algae.Tec produces high-yield algae growth and harvesting technology through the McConchie-Stroud System. The McConchie-Stroud System is designed to facilitate algae cultivation anywhere, including marginal land or industrialized areas. The system also incorporates scalability, minimal land footprint and water usage.
The company has developed and utilized process simulation models for evaluation of the algae process and its downstream biofuels, including detailed material and energy balances, process flow diagrams, unit and equipment design and specifications, plant lay-out and turnkey capital estimates. The production comprises a series of critical processing steps, including gas treatment, supply systems for carbon dioxide, light energy and nutrients; harvesting of biomass and refinement of algae products.
The advantages of the McConchie-Stroud module include:
– Reduction of capital and operating costs, due to the possibility of sharing infrastructure as modules in close proximity can be grouped, relocated and re-used.
– Minimal requirement of land, vis-à-vis peers, thereby reducing land leasing and purchase costs. – Reduced water evaporation and better recycling of water, nutrients and heat, and reduced risk of
contamination of algae from external sources.
Algae.Tec’s Portfolio and Company Risks
Intellectual Property: Algae.Tec, so far, has not obtained a patent in relation to the McConchie-Stroud System, and there is no certainty that the current patent application in Australia for the McConchie-Stroud will be granted.
Financing Requirement: The company is currently building a demonstration facility; it is quite possible that the current available funds may not be sufficient for fulfilling the initial business objective. Also the funds are not sufficient to enable the company to fully commercialize the McConchie – Stroud System. Inability to obtain additional financing may require reducing its scope of operation and scaling back its expansion and development programs.
Algae.Tec Limited – Arrowhead BID 5 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Success of McConchie-Stroud system: The company’s success largely depends on the success of its technology. Though the company has shown excellent results during its research and development phase, it still faces the risk of commercialization of algae products from the McConchie-Stroud system.
Apart from the above risks, the company faces the risk of attrition of its key personnel, operational risks, adverse weather conditions, industrial and environmental accidents, and industrial disputes.
For a detailed risk assessment, please refer to the Risk profile analysis section.
Algae.Tec’s Corporate Strategy
Algae.Tec is establishing strategic partnerships and alliances with investors, venture partners, customers and suppliers (materials, services, technologies) to accelerate the achievement of the company’s goals and objectives.
Algae.Tec currently has MOUs with:
– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in China
– The Malindra Group for the first Australian plant – Leighton Contractors for engineering and project management expertise
The company’s strategy has been focused to assess competitive algae technologies to apply the development phase results to detailed engineering evaluations of commercial plant operations. The development of unique algae technology has led to improvements in productivity, product yield, carbon dioxide sequestration and substantial capital/cost savings versus agricultural crops and other competitive algae processes in the industry.
The company is currently in the process of scaling up the technology to the next phase of commercialization with construction and operation of a demonstration Plant—Shoalhaven One—for performance evaluations, product trials and technology marketing. Total developmental capital and operating costs are budgeted at AU$4MM with a scheduled start date in Q1-2012, and the first commercial plant is projected to launch by the end of 2013.
The photo bioreactors will be employed at Algae.Tec’s demonstration plant. The plant is located at the Malindra Group’s ethanol facility situated at Nowra, south of Sydney. The Malindra Group is the largest ethanol producer in Australia.
The key milestones in the Demonstration Plant are as follows:
The initial two commercial facilities will be deployed in China and Australia. Considering the rising demand for biomass in India, the company is equally inclined towards venturing in India. There are also worldwide efforts to lower carbon emissions to which algae oil and biomass act as a healthy substitute.
Period Milestone
March 2011 Manufacturing plant operational in Atlanta
April-August 2011 Module fabrication in Atlanta
August Construction of Nowra commences
2012 Q1 Start-up of Demonstration facility
Algae.Tec Limited – Arrowhead BID 6 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Key Market Trends
Algae properties: Algae is a group of aquatic estuarine and marine plant organisms, which may range from microscopic (microalgae) to many meters in length. Algae potential is greatest in regions where there is an abundance of land, water, and sunlight. Studies show that algae species, which are primarily unicellular or diatom microalgae has a potential for biofuels, meeting the general requirement for algae production. These species are useful in producing:
– Carbohydrate (sugar) compositions most suitable for ethanol production, or – Lipid (fats/oils) compositions which are suitable for production of biodiesel, or – Hydrocarbon compositions suitable for production of renewable distillates.
The most abundant types/families of microalgae include Green, Diatom, Blue- Green and Golden Algae.
Global growth prospects: The global market for Algae is poised for explosive growth in the next 10 years reaching 61MM gallons per year and a market value of AU$1.3B by 2020 representing a CAGR of 72%, roughly on par with early developments in the biodiesel industry.
Globally, the United States is poised to ramp up production, being the earliest amongst world markets with 50% of the total algae activity. The European Union (EU) market, accounting for about 30% of algae activity, will be limited initially by the industry’s focus on university research, and later by insufficient access to water, land, and nutrient sources.
Technology: The company uses McConchie-Stroud technology system to produce algae-based biofuel. Currently, the company is pursuing the commercialization of this technology for algae production and processing system. Algae production comprises a series of critical processing steps, including supply systems for carbon dioxide, light energy and nutrients, harvesting of biomass and refinement of algae products.
For more details, refer to the Technologies and Markets section
Algae.Tec Limited – Arrowhead BID 7 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
News – Algae.Tec signs collaboration contract for demonstration plant: On June 30, 2011, the
company announced that Malindra is making several contributions to the project, including access to the land and utilities. Stroud said that, Malindra has made their personnel freely available and moreover, through their goodwill, the liaison with local contractors and specialist groups required from time to time during the construction process was facilitated. In turn, Algae.Tec’s role in the project is to build the demonstration plant, and ensure safety and site regulations are met, Stroud continued. Stroud also noted that his company currently intends to convert a percentage of the algae produced at the demonstration facility into biodiesel for use by Australia’s armed forces. Alternatively, some of the algae feedstock will be converted into jet fuel and used for testing purposes in aircraft engines.
– Algae.Tec to build demonstration Facility: On June 29, 2011, the company announced the construction of an algae demonstration facility in Shoalhaven One, in Nowra, south of Sydney, Australia. Algae.Tec signed the contract to build its proposed algae harvesting and production facility. ‘Shoalhaven One’ will be at the Malindra Group’s Nowra ethanol plant, the largest ethanol producer in Australia.
– Algae Tec’s depositary Receipts commences trading on the USA OTC market: On April 28, 2011, the company announced its American Depositary Receipts (ADR) debut on the USA OTC market under the ticker ALGXY. The Bank of New York Mellon (BNY Mellon) was appointed to establish and manage the Level 1 American Depositary Receipt (ADR) Program.
– Algae.Tec opens Atlanta Algae Development & Manufacturing Centre: On March 17, 2011, the company announced the opening of the Algae Development & Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled for shipping around the world. The Algae Development & Manufacturing Centre is an 18,200 square foot fabrication facility. The company’s executive chairman said that the center is currently being modified to enable retrofitting system process of the 40 feet steel shipping container algae growth modules, ready for the first module delivery to the center in April.
– Algae.Tec launches ADR Program: On March 17, 2011, the company announced; it had appointed the Bank of New York Mellon to commence the establishment of a Level 1 American Depositary Receipt program. The Executive chairman, Roger Stroud, said that the ADR program would give the United States energy and investors access to shares of the company, which is in a high growth phase establishing facilities in Australia and Asia.
– Algae.Tec lists on Frankfurt Stock Exchange: On February 21, 2011, the company announced that it has been accepted to list on the Frankfurt Stock Exchange (FWB). The Executive chairman, Roger Stroud said that the dual listing on FWB gives the company access to the most significant sustainable energy financial market. He also said that the company has a globally focused growth path so it is important to be part of the world’s biggest investment facility covering the European Union and United States.
– Algae.Tec lists on Australian Stock Exchange: On January 13, 2011, the company announced that it has listed on Australian Stock Exchange. On this occasion, the CEO of the company said that Algae.Tec will be the first algae company to list on a main board stock exchange in the world, and one of the few cleantech companies to be listed in Australia.
– Algae.Tec targets Australia's Cleaner Future for Power Stations Policy: On September 14, 2010, the company announced that it is targeting for inclusion in the Australian Government's Cleaner Futures for Power Stations Policy. Algae.Tec’s Executive chairman, Roger Stroud said that he understood the carbon capture and algae growth and harvesting system should be eligible for the program which seeks to establish a best practice emissions standard for new coal-fired power stations. He said the company would be seeking high-level government meetings in a bid to have the technology included as an alternative to existing proposed carbon capture and storage options.
Algae.Tec Limited – Arrowhead BID 8 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
– Algae.Tec signs MOU’s for China and Australia pre-listing: On August 26, 2010, the company announced two MOUs for non-binding commitments to deploy the technology in China and Australia. The company’s Executive Chairman said that the MOU with Hong Kong Company Pacific Minerals Limited and Australian company RKD International Pty Ltd provides for the establishment with the objective of introducing company’s technology to China.
Listing Information Algae.Tec was listed on the Australian Stock Exchange on 13-Jan-2011 and was listed on Frankfurt Stock Exchange on 21-Feb-2011. The company raised AU$5.1MM while issued 25.5MM shares at AU$20c per equity share. Algae.Tec’s American depositary Receipts (ADR) commenced trading on the USA OTC market on 28-Apr-2011.
Contacts Registered office: Suite 9, 3 Centro Avenue, Subiaco, WA, Australia, 6008 Telephone: +61 (08) 9380 6790 Email: [email protected]
Major Shareholders
Equity Holder No. of Shares Held (MM) Percentage Holding
Teco. Bio ~200.00 80.35%
Mr Peter Ernest Hatfull ~9.49 3.82% Fmr Investments Pty Ltd ~5.00 2.01%
Moltoni Corporation Pty Ltd ~4.38 1.76% Other holders less than 1% ~30.02 12.06% Source: Bloomberg - 29 Aug 2011
Algae.Tec Limited – Arrowhead BID 9 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Management and Governance The management team at Algae.Tec comprises experienced professional with a proven track record.
Mr. Roger Sydney Stroud Executive Chairman
Mr. Roger S. Stroud has over 35 years experience in a variety of industries. He spent over 10 years in finance in a number of areas including credit, money market and investment banking for CitiNational (Citibank/National Mutual) merchant bank, predominantly in Sydney.
Following the above, he floated a mining company, while undertaking the role of managing Director for eight years. In the late 1990s, Roger began the process of building businesses in the renewable fuel sector, primarily biodiesel. This included floating two separate biodiesel companies. One of these companies, Natural Fuel Ltd went into voluntary administration in April 2009. Roger was a director of Natural Fuel Ltd until October 2007. He is a founding director and 50% shareholder of Teco.Bio LLC, and is based in Perth, WA.
Mr. Garnet Earl McConchie Executive Director
Mr. Garnet Earl has over 35 years experience over a broad field of chemistry and associated technologies, including global markets, bulk chemicals and plastics, differentiated commodities and intermediates, specialty chemicals, polymers and interaction with environmental sectors.
Earl’s field experience includes international business management, plant operations, and project engineering in the United States, Europe (especially Germany, Holland, Switzerland, UK and CIS), Latin America (Brazil, Argentina and Mexico) and Asia (Korea, China and Australia).
Earl has over 10 years of specific technical and business experience in the biodiesel and glycerine industry sectors. He is a founding director and controlling shareholder of Teco.Bio LLC, and is based in Atlanta, Georgia where he has coordinated the microalgae development.
Mr. Peter Ernest Hatfull Managing Director & Company Secretary
Mr. Peter Ernest has over 30 years experience in a range of senior executive positions with Australian and International companies. He has an extensive skill-set in the areas of business optimization, capital raising and company restructuring.
He was recently Managing Director of a leading integrated metal recycling and contracting company, CMA Corporation Ltd, based in Sydney, where he managed a period of dramatic growth and increased profitability. He has experience in turnaround and slow growth situations, where companies have struggled to expand their business. This has required revitalising the business plan, attracting investor funding, and implementing profitable strategies. Peter is currently a director of Teco Pty Ltd, Kresta Holdings Ltd, Barminco Pty Ltd and is based in Perth, WA.
Mr. Timothy Morrison Non-Executive Director
Mr. Timothy is the current Director of Research and Development at Murdoch University. Tim represents the University on the Boards of a number of companies engaged in the commercialization of University IP. Mr. Morrison plays a role with a number of early stage clean tech companies supporting these groups to raise early stage capital and structure merger and acquisition transactions. Through his engagement on an Australia-based private equity investment fund, Mr. Morrison plays a role in reviewing and investing in businesses seeking early stage venture finance.
Prior to his current position, he was General Manager of MurdochLink Pty Ltd, the commercial arm of Murdoch University, which is the dedicated provider of quality research consultancy services to the professions, industry and government.
Algae.Tec Limited – Arrowhead BID 10 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Assets and Projects
Overview Algae.Tec is focused on commercializing technology that produces algae at a very fast rate, to manufacture sustainable algae oil (which is further used to produce vegetable oil, biodiesel and refined glycerine), biomass (used to produce animal protein feed, bio-ethanol and renewable distillates) and other nutrients such as fatty acids.
The company produces high-yield algae growth and harvesting technology through the McConchie-Stroud System. The McConchie-Stroud System is designed to cultivate algae virtually anywhere, including marginal land or industrialized areas. The system is designed for scalability and minimal land footprint and water usage.
Algae
Products End-Use Markets
Lipids/Oils Algae oil substitution of vegetable oil feedstocks (e.g. soybean oil, palm oil) for biodiesel industry Refined glycerine produced via algae-biodiesel production Specialty oils and fatty acids.
Carbohydrates Substitution of agricultural sourced feedstocks for conversion of carbohydrates (sugars) to bio-ethanol
Proteins High protein content algae biomass for the animal food market
Hydrocarbons Production of renewable distillates via gasification for substitution of diesel fuels.
Algae Products End-Use Markets
Biomass Feedstock source for biomass power generation with Substitution of fossil fuels Conversion of residual biomass following oil extraction to renewable distillates. Biomass nutrients suitable for use in agricultural fertilizers
Vegetable Oil
Microalgae such as higher plants produce storage lipids in the form of triacyglycerols. Comparatively, algae produce more oil than any other oilseeds which are currently in use. Many microalgae species can be induced to accumulate substantial quantities of lipids, often greater than 60% of their biomass. The table below presents indicative oil yields from various oilseeds and algae.
Yields (Gallons of oil per acre per year)v Corn 18
Soybeans 48 Safflower 83
Sunflower 102 Rapeseed 127
Oil Palm 635 Micro Algae 5,000-15,000
Depending on the geographic region, the 125Mtpa vegetable oil market (primarily, palm, soybean and rapeseed oils), representing AU$ 110Bis growing between 3% and 5%. vi Approximately 80% of the vegetable oil demand is for the food market, and consumer products and feedstock for biodiesel production account for approximately 25Mtpa of the total demand. Vegetable oil prices have historically followed agricultural supply/demand balances, population growth and standard of living; however, crude oil pricing has also significantly influenced vegetable oil prices. Soybean and palm oil prices (see chart below) vii have escalated approximately 14% per year over the past five years and the trend continues (current vegetable oil prices are AU$1220/T).
CO2
Nutrients
Water
Chemicals
Algae Production
Algae Oil
Biodiesel
Algae Oil
Biomass
Animal Protein Feed
Bio-Ethanol
Renewable Distillates
Fatty Acids
Refined Glycerine
Vegetable Oil Market
Biodiesel Market
Animal Feed Market
Ethanol Market
Diesel Fuel Market
Fatty Acid Market
Glycerine Market
Algae.Tec Limited – Arrowhead BID 11 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Palm and Soyabean oil price
0
200
400
600
800
1000
1200
1400
1600
Apr-0
1
Apr-0
2
Apr-0
3
Apr-0
4
Apr-0
5
Apr-0
6
Apr-0
7
Apr-0
8
Apr-0
9
Apr-1
0
US
$/M
T
Palm Value Soyabean Value
Fatty Acid
Another very useful form of algae is fatty acid. Fatty acid is a viscous, gum-like substance, derived from algae. It is also a very important ingredient in the manufacturing of papers and textiles. As it possesses most of the properties of gum, it is also used in the water-proofing and fire-proofing industry. It is especially helpful in making fabrics that are fire and water resistant. In the pharmaceutical industry, it is used in the manufacture of Gaviscon, Asilone, Bisodol etc. It is used as a mould-making material in life casting, prosthetics and dentistry. Like most of the forms or products of algae, alginic acid is used extensively in the food processing industry as an ingredient of soups and jellies.
The world production of fatty acids from the hydrolysis of natural fats and oils aggregates to approximately5Mtpa, which represents an AU$3B per year market. The consumption of fatty acids is related to the growth in vegetable oils and economy of the region. The current fatty acid prices range from 50% to 70% of the vegetable oil prices, which is greater than AU$500/T on an average.
Biodiesel
Most research into efficient algal-oil production predicts that biodiesel may be the only viable method to produce enough automotive fuel to replace current world diesel usage. Current biodiesel consumption represents approximately 1% of the total vehicular diesel fuel demand globally at 12.5B liters per year. Europe is by far the largest biodiesel market (approximately 80% of the global market), followed by the
United States (approximately 15% of the global market).
Biodiesel is registered and used as a direct diesel fuel substitute and fuel additive, which is most often marketed in blends of 5% to 20%. Biodiesel provides important environmental advantages, e.g., carbon dioxide sequestration, significantly reduced toxic exhaust emissions, and has the highest “energy balance” of any transportation fuel. There are more than 500 biodiesel manufacturing plants worldwide with a total in-place production capacity of 37B liters per year.
The price of biodiesel is primarily driven by the following factors: – The crude oil-derived diesel market – The level of government subsidy and, – The price of biodiesel feedstock.
Sources: Energy Information Administration – U.S. Department of Energy (EIA-DOE), U.S. Department of Agriculture (USDA) Jacobsen
Glycerine
Glycerine is a by-product in the process of producing biodiesel for pharmaceutical and consumer products industries. From every 1 mt of biodiesel 0.1 mt of glycerine is produced. Crude glycerine (80% content) is typically upgraded to refined glycerine (99.5 %+) for food, pharmaceutical and consumer product applications. The worldwide demand for
Algae.Tec Limited – Arrowhead BID 12 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
glycerine is over 1 Mtpa and continues to grow at 5% per annum. The current glycerine market is approximately AU$900MMper year at AU$750/T.
Biomass
Algae biomass may be used directly or after oil extraction for a number of major applications such as animal protein feedstock, agricultural fertilizer, biomass power generation, and further biomass conversion to ethanol via fermentation or to middle distillates via gasification and Fischer-Tropsch synthesis. Biomass after extracting oil contains about 40% to 60% carbon content dependent on the algae species and operating conditions in the form of carbohydrates, proteins and hydrocarbons.
The animal feed market is a 180Mtpa market (AU$80B per year). The primary source for animal protein feed in the U.S. is high protein soybean meal, currently priced at approximately AU$425/T. The residual algae biomass with high carbohydrate and protein contents offers a direct substitute for agricultural-based protein sources.
Ethanol
Ethanol from algae is produced by converting starch (the storage component) and cellulose (the cell wall component). Lipids in algae are converted into biodiesel, while the carbohydrates are converted to ethanol. Algae are the optimal source for second generation bio-ethanol due to the fact that they are high in carbohydrates/polysaccharides and thin cellulose walls.
The total global bio-ethanol consumption is approximately 70B liters (55Mtpa) and represents an AU$35B biofuel market per year. Bio-ethanol demand is set to double over the next 20 years. Ethanol prices correlate highly with ex-rack gasoline with current prices at AU$650/T.
Algae.Tec Limited – Arrowhead BID 13 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Technologies and Markets
Algae Chemistry and Properties
Algae is a group of aquatic estuarine and marine plant organisms, which may range from microscopic (microalgae) to many meters in length. They range from small single celled organisms to multi-cellular organism, some with fairly complex and differentiated form. Algae is usually found in damp places and bodies of water and thus are common in terrestrial as well as aquatic environment. There are more than 30,000 fresh water and salt water species of algae. Approximately 1,000 algae species show the potential for production of biofuels.
Microalgae
Studies shows that algae species which are primarily unicellular or diatom microalgae has a potential of biofuels, meeting the general requirement for algae production. These species are useful in producing:
– Carbohydrate (sugar) compositions most suitable for ethanol production, or
– Lipid (fats/oils) compositions which are suitable for production of biodiesel, or
– Hydrocarbon compositions suitable for production of renewable distillates.
These are the most primitive form of plants; however the mechanism of photosynthesis is similar to that of higher plants. Due to simple cellular structure and growth in aqueous environment with more efficient access to water, carbon dioxide and nutrients, microalgae are far more efficient converters of solar energy. Biologists have categorized algae into a variety of classes on the basis of pigmentation, life cycle and basic cellular structure. The most abundant types/families of microalgae include:
– Green Algae – They generally exhibit high growth rates and are considered as the evolutionary progenitors of modern plants. Carbohydrates and natural oils (lipids) are the main storage compounds for green algae.
– Diatom Algae – Found in oceans, they are rich in silica in the cell walls and store carbon primarily in the form of natural oils or carbohydrates.
– Blue-Green Algae – They are found in freshwater and marine environment habitats and play an important role in fixing nitrogen from the atmosphere.
– Golden Algae – Golden algae primarily exists in freshwater systems. They are very similar to diatoms but have more complex pigment systems.
Algae as Energy Sources
Shooting prices of oil, increase in consumption of fossil fuel, advances in technology development and government’s focus on global warming have attracted demand for algae as a potentially rich source of sustainable biofuels. Algae are very beneficial as a renewable fuel resource because of the following advantages:
– It has one of the most efficient and fastest production cycles, which converts solar energy and carbon dioxide into renewable and sustainable fuels.
– It is an environment friendly source of producing energy. It efficiently sequesters atmospheric carbon dioxide, favorably balances greenhouse gas production and reduces the long-term impact of global warming. Also, it provides environmental solutions for recovery of toxic stackgas pollutants and remediation of polluted water streams.
– The production of oil per land mass is greater than any terrestrial crop and can be cultivated virtually anywhere.
– Also, the hydrocarbons derived from algae production can be used to produce renewable biofuels for direct substitution of fossil fuels.
Global Algae Market Opportunitiesviii
The global market for Algae is poised for explosive growth in the next 10 years reaching 61MM gallons per year and a market value of AU$1.3B by 2020, representing a CAGR of 72%, roughly on par with early development in the biodiesel industry.
Globally, the United States is poised to ramp up production the earliest amongst world markets, with 50% of all algae activity. The European Union (EU) market, accounting for about 30% of algae activity, will be limited initially by the industry’s focus on university research, and later by insufficient access to water, land, and nutrient sources. It is believed that United States and Europe cannot grow enough corn,
Algae.Tec Limited – Arrowhead BID 14 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
soy, or rapeseed to meet there bio-fuel targets. Latin America and Asia Pacific, which have fewer projects in operation today, are set to gain significant market share in the long run.
Ultimately, algae potential is greatest in regions where there is an abundance of land, water, and sunlight. Secondary considerations include favorable regulations around biofuels mandates, greenhouse gas (GHG) emissions, wastewater treatment, and livestock operation, as well as potential co-location opportunities (wastewater remediation and carbon recycling). Algae is becoming one of the most promising sources of biodiesel as it is biodegradable and can be produced using ocean and waste water without depleting fresh water resources.
The industry believes that the algae-based biofuels market will be characterized by regional collaborations and partnerships that are able to capitalize on efficiencies through expertise related to unique environmental conditions, co-location opportunities, and access to end markets. This horizontal organization will result in significant consolidation within the market over the next decade.
Algae are attracting increased investments and interests from bio-fuel, petroleum and agribusiness industries. Driven by escalating global climate change concerns and the rising cost of petroleum-based energy, companies and government entities are developing the use of bio-fuels derived from algae to reduce carbon emissions from power plants and generate renewable transportation fuels.
Using an intricate process of photosynthetic, companies have developed biodiesel and ethanol from algae that, given optimal conditions, can double its volume overnight. Up to 50% of an alga's body weight is comprised of oil, whereas
oil-palm trees - currently the largest producer of oil to make bio-fuels - yield just about 20% of their weight in oil.
Technology
The company uses McConchie-Stroud technology system to produce algae-based biofuel. Currently, the company is pursuing the commercialization of this technology for algae production and processing system.
Algae are micro organisms that contain chlorophyll, and with water, carbon dioxide and sunlight they produce complex carbon chain molecules such as hydrocarbons and polysaccharides and proteins. The composition of algae product is dependent on the specific species utilized and the photo-synthesis operating conditions employed. Algae products contain 45%-80% of carbon content in the form of lipids/oils, carbohydrates, proteins and hydrocarbons.
Algae Production
Algae production comprises a series of critical processing steps, including supply systems for carbon dioxide, light energy and nutrients, harvesting of biomass and refinement of algae products.
The company developed and utilized process simulation models for evaluation of the algae process and its downstream bio-fuels, including detailed material and energy balances, process flow diagrams, unit and equipment design and specifications, plant lay-out and turnkey capital estimates. Based on the development phase results, engineering design and process simulation modeling, material and energy balance data are presented in the process flow diagram for a typical algae plant.
Algae.Tec Limited – Arrowhead BID 15 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Water SupplySeed AlgaeCO2 Nutrients & Water
Make-upAlgae Unit
Nutrient System
Alkalinity System
Modular Photo-Reactors
Gas Treatment
Harvesting & Separation
Product Refinement
Algae Oil
Fatty Acids
Biomass
Nutrients
Chemicals
Light Energy
Stackgas
Conversion Energy
Off-Gas
Additives Biomass Losses
Recycle Water
Chemicals
Vents
Recycle Water
DiluteAlgae-Water
Algae-Water
Process Areas The entire process of algae production and processing is described in following table:
Process Steps Process Description Key Unit Operations
Gas Treatment
Utilization of high CO2 content (8-15% volume) stackgas from fossil fuel power plants, biomass etc. Preparation of stackgas for photo-reactors, including water removal, temperature control, compression and gas distribution.
Stackgas Pre-Treatment Water Recycle Gas Distribution Network Recovery of Module Off-Gas
Light Energy Supply
Solar energy in the form of visible light absorbs and converts CO2 to produce algae.
Solar Collection Visible Light Filtration & Distribution Energy Recovery/Storage
Raw Material Systems
Preparation units for water supply, nutrient package, alkalinity control and make-up algae. Nutrients, Nitrogen and Phosphorus are formulated via addition of industrial fertilizers.
Water Supply (fresh, marine and/or wastewater) Alkalinity Control Nutrient Preparation Unit Make-up Algae Control System
Modular Photo-Reactors
Photosynthesis bio-reactor system controls the overall productivity and desired product yields per species.
Modular Photo-Reactors Internal Light Distribution Network per Module Modular Infrastructure & Process Controls per Module Series
Algae.Tec Limited – Arrowhead BID 16 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Process Steps Process Description Key Unit Operations
Harvesting
Low concentration of micro-algae in final output requires various algae separation measures. Recovery methods for algal cell fracturing and direct recovery of hydrocarbon products provide improved overall energy efficiencies.
Combinations of Flocculation, Gas-Lift Frothing & Paste Handling Mechanical Separation Units Algae Biomass Refinement
Product Refinement
Algae biomass contains predominantly lipids (fats/oils) and carbohydrates Conventional oil extraction technologies (mechanical expeller and/or solvent extraction) are employed to recover crude algae oil. Chemical treatment and refinement is required for purification of the finished algae oil product.
Algae oil acts as raw material for biodiesel (and glycerine). Biomass is a source of animal feed, ethanol and other energy sources.
Biodiesel & Glycerine via Oil Transesterification Biomass Animal Food Products Ethanol Production Middle Distillates Production Power Generation via Biomass Gasification
Algae.Tec Limited – Arrowhead BID 17 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Porter’s Five Force Analysis for the Biofuel industry in Australia
Overview Australia’s algae oil rush is fueled by a combination of tough emission control standards and state-by-state bio-fuel mandates. Carbon emitters will pay an AU$23/T tax starting in 2012, which accelerated a boom for carbon capture and bio-fuels. The bio-fuel consumption increased 34% from 2009 to 2010.
The Malindra-Algae.Tec demonstration offers both emission control as well as bio-fuel. Algae Tec photobioreactor modules will use carbon dioxide (CO2) produced by ethanol processing to feed algae, which consumes two parts CO2 for every part algae produced.
Barriers to Entry High
• High Capital Investment• High-end scientif ic expertise• Patented Technologies • Economic Viability of new
technologies
Power of Customers Low
Customer base is spreadacross industries – which giveless control to any particularindustry.• Aviation industry: shift to
biodiesel due to pressuresfrom clean energy andemission standards
• Glycerine: used extensivelyin pharmaceutical andconsumer product industry -growing around 5% everyyear
• Vegetable oil: Algae would bepreferred as it produces 10-100 times oil in the samearea as crops
Power of suppliers Low
• Engineering Suppliers (tobuild the production unit) willhold key to the systems built(repairs & maintainance)
• Bargaining power: othersuppliers will be dependent onthe type of technology used.For instance, Solazyme usesSugar/ Starch to cultivatealgae whereas Algae.Tec useslight, which reduces thesupplier bargaining power.
Threat of substitutes Low
• Algae is the best availablesubstitute for oils – biodieseland vegetable oil ,andvarious other uses in paperand textile industry
Industry competition Medium
• The existing players are highlyexperienced and very few in number.
• The success of the industry is onbased on technological expertise andthe strong R&D team .
• Some of the players already havegrants from govt. to supply fuel forthem and also contracts from variousairlines
Algae.Tec Limited – Arrowhead BID 18 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Project Risk Profile Analysis Peer Risk Analysis
We have evaluated the risk profile of Algae.Tec compared with other biofuel players in Australia. We identified the risk as “Medium” on a comparative basis and assigned a score of “1.8” based on the risk profile of the major projects pursued by the company as well as its peers. The important risk categories considered for the study include:
– Project Stage Risk: Medium - Near feasibility
– Intellectual Property Risk: Medium – Yet to be patented
– Financing Risk: Low – Successfully publically issued its shares
– Operational Risk: Medium – dependent on technology used
The Risk Profile has been assessed as a weighted blended score based on the project stage risk (30% weight), intellectual property risk (30%), financing risk (20%), and operational risk (20%).
The individual risk parameters and the underlying rationale for the scores are discussed in the subsequent sections.
Peer Risk Profile
Ticker Total Risk
Score
Project Stage Risk
Intellectual Property
Risk
Financing Risk
Operational Risk
AEB 1.8 2 2 1 2
PALG 1.4 1 1 2 2
SZYM 1.2 1 1 1 2
Intellectual Property Risk - MEDIUM
The company has not obtained a patent in relation to the McConchie-Stroud System so far. There is no surety that the current patent application in Australia for the McConchie-Stroud will be granted, or that any other patent applications that may be lodged in relation to the McConchie–Stroud system will be granted.
There is always a risk of a third party bringing a claim in relation to any aspect of the property. Any dispute will adversely affect the company. However, the company has taken reasonable steps to protect the ownership of the intellectual property related to the McConchie-Stroud and believes that there is no third-party interest.
Financing Risk - LOW
The company is in its initial stages of development. The company is building a demonstration facility and there is no guarantee that current available funds will be sufficient for fulfilling the initial business objective. The company will be required to raise additional funds in the future and faces the risk of obtaining it on terms which are favorable to the company. Additionally, the funds are not sufficient to enable the company to fully commercialize the McConchie–Stroud System.
Any additional equity financing will dilute shareholders interest, and debt financing, if available, may involve restrictions on financing and operating activities. If the company is not able to obtain additional financing, it may be required to reduce its scope of operations and scale back its expansion and development programs.
Success of the McConchie-Stroud System - HIGH
The company is relying on the success of its McConchie-Stroud system and believes that it will be able to develop and commercialize the system in the near future. Though the company has shown excellent results during its research and development phase, it still faces the risk of commercialization of algae products from the McConchie-Stroud system.
Key Personnel - MEDIUM
The company faces the risk of losing its two key directors, Messrs McConchie and Stroud, who developed the McConchie-Stroud system. While these directors are the major shareholders in the company, non involvement of either of them will adversely hamper the company’s future plans.
Operational Risks- LOW
The company’s demonstration and commercial plants proposed by the company may be affected by various factors, including failure to locate a suitable location, failure to achieve predicted yields of algae and algae products, operational and technical difficulties encountered in scaling up the McConchie–Stroud system to commercial production level. The company also faces the risk of unanticipated bioreactor problems which may affect the production cost.
Apart from the above risks, the company faces the risk of adverse weather conditions, industrial
Algae.Tec Limited – Arrowhead BID 19 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
and environmental accidents, currency risk and industrial disputes.
Peer Profile Petroalgae Inc.
Petroalgae Inc. is a Melbourne-based algae production firm that has lemna as its main output. It is easier, at present, to grow, harvest and dewater lemna than the unicellular algae harvested by Algae.Tec. Lemna shares with microalgae, a rapid growing rate and ability to generate large amounts of usable biomass on non-productive land.
The company is planning to optimize the growth of indigenous micro-crops with open tanks at commercial scale through the management of light exposure and other elements of the environment. The technology monitors variable parameters, including light, temperature, density and nutrition, to determine the optimal point in the growth cycle at which the biomass should be harvested.
The company plans to generate licensing fees and royalties from customer licensees in the global energy and agriculture markets. They would consider entering into alternative arrangements in which license fees and royalties would be reduced in place of a greater share of the operation’s profits, but with no direct exposure to capital requirements.
The company has two hector demonstration facilities in Florida, while it has done testing of its
fuel produce along with Siemens and the University of Utah.
Solazyme Inc.
The San Francisco-based, Solazyme Inc., grows algae with sugars in closed fermentation tanks to create oils, which can be used for liquid fuel and for chemicals, foods, or personal care products. Solazyme proprietary microalgae are heterotrophic, meaning they grow in the dark (in fermenters) by consuming sugars derived from plants that have already harnessed the sun's energy. By using standard industrial fermentation equipment, they're able to efficiently scale up and accelerate microalgae's natural oil production time to just a few days and to commercial levels.
The company's strategy has been to make oils for specific personal care and nutritional markets before taking on liquid fuels where there is margin pressure and brands play a major role. It has customers for food and personal care and was awarded a Department of Energy grant to make fuel for use by the Navy, which successfully tested a 50-50 blend of petroleum and algae oil. Solazyme has development arrangements with airlines Qantas, Chevron Technology Ventures, and with chemical company Dow.
Solazyme signed an agreement with Bunge for commercial renewable oil plant in Brazil. This JV planning to build 100,000 mt renewable oil production facility located at Bunge owned sugar cane mill in Brazil.
Algae.Tec Limited – Arrowhead BID 20 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Risk Parameters – Definition
Project Stage Risk
Arrowhead understands the different project stages for this business model to be:
– Laboratory Research: Deals with research and development (R&D) of the project.
– Pilot Tests: Initial tests of the R&D results are carried out for the technical, commercial, and economic feasibility of the project.
– Demostration Plant: The Plant will be of much high capacity than of the pilot tests and intends to prove the commercial feasility of the project.
– Commercial Plant: Based on market prospects the commercial plant with required capacity will be developed for the production.
We consider a project to be of lower risk profile if demonstration plant is successfully completed and yields desired results and a commercial plant is underway as the uncertainty regarding the commercialization of the project reduces significantly.
Project Financing Risk
The projects in this industry are very capital intensive. Therefore, this business model, in general suffers for financing risk as the viability of the project is known only at a later stage, when half of the capital outlay is done.
The industry has most of the initial projects financed by private equity firms or venture capitalists. Other important source could be equity financing as resorted to by most startup
biofuel companies. Debt is considered only as a last option to the public issue due to high financing charges as well as financial covenants attached.
We consider a project to be of lower risk profile if demonstration plant is successfully completed and yields desired results as the viability of the project will be proved.
Intellectual Property Risk
The technology used for the culture, and harvesting of algae and the production are highly dependent on the company’s research and technical capabilities and are mostly developed in-house. In-house developments generally involve huge R&D expenditure which they aim to recover from future revenues.
We consider a project to be of lower risk profile if the technology possesses all necessary patents.
Operational risk
Depending on technology, the input used for the culture of algae would be light or sugar/starch. The technology using light as its input for culture will need to set up the necessary infrastructure whereas when the input is sugar/starch, there is an additional uncertainty with respect to the cost and availability of the input.
Since the culture of algae is technology driven, we see the risk emerging from system break-down requiring technical expertise.
We consider a project to be of lower risk profile if its input available at lesser cost than its peers input and is available in abundance.
Algae.Tec Limited – Arrowhead BID 21 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Company Ticker Major Projects Project Stage
Financing information
Market cap
(AU$MM)
Enterprise value
(AU$MM)
Algae.Tec in comparison with peer
Algae.Tec AEB Demo Plant with Malindra
Building a demo plant
IPO in April 2011 for AU$20c
81.81 87.31
Algae.Tec is in its initial stages when compared to its peers. It is currently building a demo plant whereas Petroalgae has an operational demo plant and Solazyme has a fully commercial plant in place.
Algae.Tec’s demo plant is made along with Malindra, the largest Ethanol producer in Australia.
Algae.Tec has also received recognition from aviation industry for its fuel demo plant with Malindra.
PetroAlgae PALG
Ministry of Natural Resources for the Republic of Suriname
Biomass fuel test
Active Demo Plant in US
IPO underway
Currently managed by Private equity firms
1,176 1,240
Algae.Tec is in its developing stages while Petroalgae has a functional demo plant in place. Algae.Tec is currently building a demo plant for commercialization of algae production, which will be functional in early 2012.
Solazyme SZYM
Chevron Technology Ventures
Marine Diesel fuel for US NAVY
Renewable chemicals
Nutrition products
Skincare Products
Commercial Plant
IPO in 2011 in May 2011 for $18 per share.
Joint – 50:50 between the project partners
750.6 504.7
Algae.Tec is in its infant stage when compared to Solazyme, which has a functional commercial plant supplying fuel to US Navy.
Algae.Tec Limited – Arrowhead BID 22 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
SWOT Analysis
Global market for Algae is poisedfor explosive growth in the next10 years, demand reaching 61MMgallons per year of bio-fuel and amarket value of AU$1.3B by 2020
Aviation industry is looking forclean fuels to reduce carbonfootprints and also to reduce fuelcosts
Reduced cultivation area willincrease demand for vegetable oilfrom algae; which produces 10-100 times per acre of landcompared to crops
The McConchie –Stroud System isyet to obtain the patent for theQuantum Fracturing Technologyused
Messrs McConchie and Stroud,directors and major shareholders,developed the McConchie-Stroudsystem. Non involvement of eitherof them could adversely hamperthe company’s operations
Strong Management team with corecompetencies in biofuel technologies,energy markets, projectcommercialization and businessmanagement.
Developed McConchie-Stroud Systemwhich cultivates high yield algae andeconomically harvests them.
Technology facilitates algaecultivation even in marginal land orindustrialized areas
Strengths
The McConchie –Stroud System isyet to tested for itscommercialization with a demoplant. The demo plant will beoperational by early 2012
Unanticipated bioreactor problemsmay affect the production costonce the production iscommercialized
Weaknesses
Opportunities
Threats
SWOT
Algae.Tec Limited – Arrowhead BID 23 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Value The Fair Market Value for Algae.Tec shares stands between AU$375.3MM to AU$532.2MM.
The Fair Market Value for one of Algae.Tec publicly traded shares stands between AU$1.51 to AU$2.15.
Algae.Tec Balance Sheet Forecast
CONSOLIDATED BALANCE SHEET
all figures in '000 AU$, unless stated differently
Low bracket estimates
year ending June 30 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Total Current Assets 3,741 19,797 63,839 106,195 149,205 192,999 237,589 Total Non-Current Assets 29,815 55,633 52,574 49,682 46,949 44,367 41,927 TOTAL ASSETS 33,556 75,430 116,412 155,877 196,154 237,367 279,516 Total Current Liabilities - 1,603 3,598 3,670 3,743 3,818 3,895 Total Non-current Liabilities 22,400 44,800 44,800 44,800 44,800 44,800 44,800 TOTAL LIABILITIES 22,400 46,403 48,398 48,470 48,543 48,618 48,695 Total Shareholders’ Equity 11,156 29,027 68,014 107,407 147,611 188,749 230,822 TOTAL LIABILITIES and EQUITY 33,556 75,430 116,412 155,877 196,154 237,367 279,516 Important information on Arrowhead methodology
The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent, depending on the sub-sectors in which the research is conducted. But all Arrowhead valuation researches possess an underlying set of common principles and a generally common quantitative process.
With Arrowhead commercial and technical due diligence, the company researches the fundamentals, assets and liabilities of a company, and builds estimates for revenue and expenditure over a coherently determined forecast period.
Elements of past performance such as price/earning ratios, indicated as applicable, are mainly for reference. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence.
We have also presented the comparables method based on market capitalization per resource of gallon (AU$/gallon) as a secondary measure of fair value, which, though is not central to the methodology applied towards building the fair value bracket, is presented here as additional information.
Arrowhead BID Fair Market Value Bracket
The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analyses such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a valuation tool.
In principle, an investor comfortable with the high brackets of our key variable analysis will align with the high bracket in the Arrowhead Fair Value Bracket, and, likewise, in terms of low estimates. The investor will also note the company intangibles to analyze the strengths and weaknesses, and other essential company information. These intangibles serve as supplementary decision factors for adding or subtracting a premium in investor’s own analysis.
The bracket should be taken as a tool by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand that while on the one hand global capital markets contain inefficiencies, especially in terms of information, on the other, corporations and their commercial and technical positions evolve rapidly. This present edition of the Arrowhead valuation is for a short to medium-term alignment
Algae.Tec Limited – Arrowhead BID 24 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
analysis (one to twelve months). The reader should refer to important disclosures on page 26 of this report.
Information on the Algae.Tec valuation
Algae.Tec Valuation Methodology: The Arrowhead fair valuation for Algae.Tec is based on the discounted cash flow (DCF) method. Valuation is based on for the three products namely—Algae Oil, Biomass and other nutrients.
Time Horizon: The Arrowhead fair valuation for Algae.Tec is based on a DCF method. The time period chosen for the valuation is ~130 months (2012-2022). While revenue is expected to ramp up significantly during the 2013-16, the later years are heavily discounted and have a marginal effect on valuation, which are included primarily to present a full project cycle situation.
Underlying Business Plan: Algae.Tec limited is establishing strategic partnerships and alliances with investors, venture partners, customers and suppliers (materials, services, technologies) to accelerate achievement of the company’s goals and objectives. Algae.Tec currently has MOUs with:
– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in China
– The Malindra Group for the first Australian plant
– Leighton Contractors for engineering and project management expertise
The initial two commercial facilities will be deployed in China and Australia. Considering the rising demand for biomass in India, the company is equally inclined towards venturing in India. The company plans to invest IPO proceedings in building demonstration facility. It has inaugurated Algae Development & Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled. Algae.Tec has applied for patents in relation to McConchie-Stroud System, which would cement its technological core competency.
Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 0%, representing the maturity, technology change and prospective competiveness in the business.
Prudential Nature of Valuation: This Arrowhead Fair Value Bracket estimate is a relatively prudential estimate, as it discounts the eventuality of the company acquiring and producing from any projects other than Malindra - Algae.Tec Demo Plant before 2021.
Algae.Tec Limited – Arrowhead BID 25 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Key variables in Algae.Tec revenue estimations
Variable 1 – Modules Constructed
Arrowhead has forecasted the modules construction capacity in lines with the company’s estimates. We believe the company will install the first module and will go operational from 2013. Overall, we have remained conservative in estimating the number of modules considering some level of uncertainty in future revenue generation. Additionally, financing and technology risk could adversely impact the company’s potential revenue generation or could delay the company’s revenue-related strategy.
Arrowhead believes that the low and high estimates of cultivation of algae from one module are 225T and 250T per year respectively, maintaining it close to company’s estimates.
Variable 3 – Algae Oil, Biomass and Other Nutrients Prices
Arrowhead has forecasted the following low end and high end price range for the three products:-
Project Low end (AU$/mt) High end (AU$/mt) Algae Oil 1,175 1,225
Biomass 375 425
Fatty Acid (Other nutrients) 400 450 Algae oil is a substitution of soya and palm oil which are used as raw material for biodiesel production. Currently, soya oil and palm oil are trading in a range of AU$1250/T to AU$1300/T. We have assumed that algae oil would sell at a discount of around 10% to soya oil and palm oil prices since it’s a new input for bio diesel production.
Biomass can be substituted by high protein soybeans and corn which currently trade at AU$300/T and AU$550/T, respectively. We have used the average of these two prices to arrive at the selling price of the biomass produce.
Currently fatty acid trades at around AU$300/T. We believe algae fatty acid output would fetch a similar price.
Algae.Tec Limited – Arrowhead BID 26 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Analyst Certifications and Important Disclosures
Analyst Certification
This report was prepared by a team of analysts.
I, Thomas Renaud, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security and the subject company. I also own at this point in time a long equity position in Algae.Tec.
I, Rashmi Shah, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security and the subject company.
Important Disclosures
Arrowhead Business and Investment Decisions, LLC received fees in 2011 from “company name” for researching and drafting this report and for a series of other services to “company name, including distribution of this report and networking services. Two of Arrowhead’s partners including Thomas Renaud, own long equity positions in Algae.Tec.
Aside from certain reports published on a periodic basis, the large majority of reports are published by Arrowhead BID at irregular intervals as appropriate in the analyst’s judgment.
Any opinions expressed in this report are statements of our judgment to this date and are subject to change without notice.
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, any of the financial or other money-management instruments linked to the company and company valuation described in this report, hereafter referred to as “the securities”, may not be suitable for all investors.
Investors must make their own investment decisions based upon their specific investment
objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors are advised to gather and consult multiple information sources before making investment decisions. Recipients of this report are strongly advised to read the information on Arrowhead Methodology section of this report to understand if and how the Arrowhead Due Diligence and Arrowhead Fair Value Bracket integrate alongside the rest of their stream of information and within their decision taking process.
Past performance of securities described directly or indirectly in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from any of the financial securities described in this report may rise as well as fall, and may be affected by simple and complex changes in economic, financial and political factors.
Should a security described in this report be denominated in a currency other than the investor’s home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the security.
This report is published solely for information purposes, and is not to be considered as an offer to buy any security, in any state.
Other than disclosures relating to Arrowhead Business and Investment Decisions, LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data.
Arrowhead Business and Investment Decisions, LLC is not responsible for any loss, financial or other, directly or indirectly linked to any price movement or absence of price movement of the securities described in this report.
Algae.Tec Limited – Arrowhead BID 27 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Valuation WACC Risk-free rate 4.21% ix
Production/
Module Algae Biomass Other Beta 0.80 x
Risk premium 6.0% xi Max value 225 1175 375 400
Additional Risk Premium 1.0% xii Cost of Equity 9.8% xiii Min
Present Value of FCF (12,095) 4,008 21,516 26,899 24,874 23,065 21,386 19,828 18,382
AU$/share Contribution by Key Variable
‐
0.50
1.00
1.50
2.00
2.50
Low Algae Oil Biomass Other Nutrients
High
ARROWHEAD FAIR VALUE BRACKET High Low Terminal Value (TV) 766,365 568,843 Present Value of TV 253,225 187,959 Present Value of FCF + TV 529,832 372,842 + Cashxv 2,413 2,413 Equity Value Bracket 532,245 375,255 Shares Outstanding (in '000)xvi 247,922 247,922
Fair Value Bracket AUD 2.15 AUD 1.51 Current Market Price AU$0.33 AU$0.33 Current Market Capitals 81.81 81.81 Target Market Capital 532.2 375.3
Algae.Tec Limited – Arrowhead BID 28 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
Notes
i Arrowhead Business and Investment Decisions Fair Value Bracket - AFVBTM. See information on valuation on pages 23-27 of this report and important disclosures
on page 26 of this report
ii Source: Bloomberg - 06-September-2011
iii Source: Bloomberg - 06-September-2011
iv Source: Bloomberg 3 month volume - 06-September-2011
v Source: http://oakhavenpc.org/cultivating
vi http://www.indexmundi.com/commodities/?commodity=soybean-oil&months=120
vii Source: http://www.indexmundi.com/commodities/?commodity=palm-oil&months=60
viii Solurce:http://www.emerging-markets.com/algae/Algae2020StudyandCommercializationOutlook.pdf; http://www.energybusinessreports.com/shop/item.asp?itemid=1450
ix Australian Government 10 year bond yield from Bloomberg as on 06 September 2011
