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Algae.Tec Limited ± Arrowhead BID 1 OTCBB: ALGXY ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report. Due Diligence and Valuation Report Arrowhead Code: 100106 Coverage initiated: 23 Mar 2011 This document: 07 Mar 2012 Fair share value bracket: AU$1.15 to AU$2.70 i Share price on date: AU$0.37 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 Vishal Pasari Rashmi Shah [email protected] [email protected] Market Data 52Week Range: AU$0.29 to AU$0.63 iii Average Daily Volume: 268,135 iv Market Cap. on date: AU$98.04MM Financial Forecast Data (in AU$) µ( µ( µ( µ( 16E µ( µ( High profit/ (loss) MM (6.7) 25.6 52.7 54.2 55.3 56.5 58.0 High EPS AU$ (2.52) 9.68 19.09 19.61 16.97 17.34 17.79 Low profit/ (loss) MM (6.4) 12.9 17.6 18.9 19.5 20.1 20.9 Low EPS AU$ (2.43) 4.89 6.37 6.83 5.98 6.16 6.40 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. Algae.Tec developed the McConchieStroud System, which cultivates and economically harvests high yield algae. 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. The company is now building a demonstration facility with Manildra to prove commercial viability of the System. The company intends to initiate the development and operation of commercial facilities in Australia, U.S., Brazil and Southern Europe predominantly by way of Joint Venture (JV). The products will be primarily Biodiesel and GradeA Jet Fuel. In Jan 2012, the company entered into a JV with Shandong Kerui Group to a 250module algae biofuels facility in China. The JV will be an equally funded facility to producing algae derived transport oil and biomass of over $40MM and capturing 137KT of waste carbon dioxide. The Company has collaborations with Holcim Lanka Ltd. to develop its first algae biofuel production plant in Sri Lanka and with Lufthansa $LUOLQHV WR HYDOXDWH DOJDH RLO IURP $OJDH7HF¶V bioreactors as a substantial source of aviation biofuels. In Jan 2012, Algae.Tec raised $5.0MM via 12.5MM shares at an issue price of 40c/share through Patersons Securities. In Dec 2011, Algae.Tec secured funding support from San Francisco based La Jolla Cove Investments with $6m in convertible notes to be drawn down over a threeyear period. In Jan 2012, S&P commenced Factual Stock Report coverage on Algae.Tec, upgrading and extending the reach and profile of the Company in the USA investor community. Algae.Tec tapped into international capital markets with a public offer and listed on the Australian Stock Exchange and Frankfurt Stock Exchange. On Feb 22 nd WKH FRPSDQ\¶V American Depositary Receipts started trading on the highest tier of the OTC market, OTCQX. 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. 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 FRPSDQ\¶V IDLU VKDUH YDOXH OLHV LQ WKH AU$1.15 to AU$2.70 bracket.
Transcript
Page 1: Algae.tec   abid report - 07 mar12

Algae.Tec Limited Arrowhead BID 1 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Due Diligence and Valuation Report

Arrowhead Code: 10-­01-­06

Coverage initiated: 23 Mar 2011

This document: 07 Mar 2012

Fair share value bracket: AU$1.15 to AU$2.70i

Share price on date: AU$0.37ii

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

Vishal Pasari Rashmi Shah [email protected] [email protected]

Market Data 52-­Week Range: AU$0.29 to AU$0.63iii Average Daily Volume: 268,135iv Market Cap. on date: AU$98.04MM

Financial Forecast Data (in AU$) 16E

High profit/ (loss) MM

(6.7) 25.6 52.7 54.2 55.3 56.5 58.0

High EPS AU$

(2.52) 9.68 19.09 19.61 16.97 17.34 17.79

Low profit/ (loss) MM

(6.4) 12.9 17.6 18.9 19.5 20.1 20.9

Low EPS AU$

(2.43) 4.89 6.37 6.83 5.98 6.16 6.40

Fiscal Year (FY) 1st July 30th 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.

Algae.Tec developed the McConchie-­Stroud System, which cultivates and economically harvests high yield algae. 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. The company is now building a demonstration facility with Manildra to prove commercial viability of the System.

The company intends to initiate the development and operation of commercial facilities in Australia, U.S., Brazil and Southern Europe predominantly by way of Joint Venture (JV). The products will be primarily Biodiesel and Grade-­A Jet Fuel.

In Jan 2012, the company entered into a JV with Shandong Kerui Group to a 250-­module algae

biofuels facility in China. The JV will be an equally funded facility to producing algae derived transport oil and biomass of over $40MM and capturing 137KT of waste carbon dioxide.

The Company has collaborations with Holcim Lanka Ltd. to develop its first algae biofuel production plant in Sri Lanka and with Lufthansa

bioreactors as a substantial source of aviation biofuels.

In Jan 2012, Algae.Tec raised $5.0MM via 12.5MM shares at an issue price of 40c/share through Patersons Securities. In Dec 2011, Algae.Tec secured funding support from San Francisco based La Jolla Cove Investments with $6m in convertible notes to be drawn down over a three-­year period.

In Jan 2012, S&P commenced Factual Stock Report coverage on Algae.Tec, upgrading and extending the reach and profile of the Company in the USA investor community.

Algae.Tec tapped into international capital markets with a public offer and listed on the Australian Stock Exchange and Frankfurt Stock Exchange. On Feb 22nd American Depositary Receipts started trading on the highest tier of the OTC market, OTCQX.

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.

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

AU$1.15 to AU$2.70 bracket.

Page 2: Algae.tec   abid report - 07 mar12

Algae.Tec Limited Arrowhead BID 2 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Table of Contents

Algae.Tec Presentation ..................................................................................................... 3

News ................................................................................................................................. 7

Listing Information ........................................................................................................... 9

Contacts ............................................................................................................................ 9

Major Shareholders ........................................................................................................... 9

Management and Governance ......................................................................................... 10

Assets and Projects ....................................................................................................... 11

Technologies and Markets ............................................................................................... 14

Project Risk Profile Analysis ............................................................................................ 18

Peer Profile ..................................................................................................................... 19

Value ............................................................................................................................... 22

Analyst Certifications and Important Disclosures............................................................ 25

Valuation ......................................................................................................................... 26

Page 3: Algae.tec   abid report - 07 mar12

Algae.Tec Limited Arrowhead BID 3 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Company 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 through a novel modular photo-­reactor system and improved algae harvesting and product refinement technologies. The current strategy of continuous improvement and adherence to quality control in existing markets, are expected to assist in the

ique 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 building a demonstration facility with Manildra to prove its commercial viability.

The 70,000 sq ft Algae Development & Manufacturing facility in Atlanta, Georgia, is the algae-­to-­transport fuel development and manufacturing hub for the USA, Asia and Europe. Currently, this facility is also being used to build the first full size modules that will be established on the Manildra site in Nowra, NSW.

remiums

Algae.Tec benefits from a wide range of benefits encompassing a sound business model, advanced technology and strategic partnerships.

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.

d 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.

Algae.Tec requires relatively lesser land to produce the same amount of oil than the land required for oil production from palm, jatropha, canola, soy, cotton, corn etc.

Algae.Tec provides a long-­term sustainable fuel source not derived from food source vegetable oils.

Algae.Tec, due to the nature of its operation, is not subject to significant environment regulations under both the Commonwealth and state legislation.

Technology: Photosynthesis is a biochemical process, during which algae absorbs light energy from sunlight and carbon dioxide;; utilizes water and critical nutrients and undergoes multiple step light and

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Algae.Tec Limited Arrowhead BID 4 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

dark phase reactions to biologically produce primarily lipids, carbohydrates and proteins subsequently generating oxygen. The Algae.Tec system combines closed control of algae production within an engineered modular environment and efficient downstream bio-­fuel processing. The Algae.Tec production process is described below.

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. McConchie-­Stroud System consists of a modular reactor in which minute plants, called microalgae are grown and related infrastructure used for harvesting and refining into algae products.

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.

Strategic Partnerships

On 1st Dec 2011, the company announced that it signed a collaboration contract with Holcim Lanka Ltd. to build its first bio-­fuels production facility in Asia. This is an initiative by Holcim Lanka Ltd. to reduce its carbon footprint by channeling waste carbon dioxide into algae growth system and generating valuable biofuel at below market cost. The biofuel production facility to be built by Algae.Tec is expected to initially comprise a production plant of five photo-­bioreactor modules. This plant is expected to allow Holcim to evaluate the benefits of capturing more of the waste carbon dioxide in a much larger facility. The success of this installation will allow Holcim Lanka to access the viability of a bigger facility.

On 21st Dec 2011, the company announced that it has signed a memorandum of understanding with the Lufthansa Airlines, a European airline bioreactors to be developed into a substantial source of aviation biofuels.

On 18th Jan 2012, the company entered into a Joint Venture with Shandong Kerui Group to a 250-­module algae biofuels facility in China. It will be an equally funded facility for producing

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Algae.Tec Limited Arrowhead BID 5 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

approximately 33MM liters of algae derived transport oil and 33KT of biomass annually at a combined value of over US$40MM, and capture 137KT of waste carbon dioxide. The joint venture will allow Algae.Tec to expand its biofuels facilities throughout China.

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.

Strategic Partnership: The Company intends to initiate the development and operation of commercial facilities in several countries, predominantly by way of joint venture with focus on Australia, U.S.A., China, Brazil and Southern Europe. The products will primarily be Biodiesel and Grade-­A Jet Fuel. Different countries have different environmental regulations and the company has to find right strategic partner for success in these countries.

Financing Requirement: operation and require scaling back expansion and development programs. The company is building a demonstration facility and it is possible that available funds may not be sufficient to fulfill the business objective. However, in Dec 2011, Algae.Tec secured funding support from San Francisco based La Jolla Cove Investments with $6MM in convertible notes to be drawn down over a three-­year period. This will enable the Company to fast-­track the Holcim Lanka biofuel project and carbon capture facility and projects in Europe. Also in Jan 2012, the company comfortably raised AU$5MM through Patersons Securities by issuing 12.5MM shares at an issue price of 40c/share to sophisticated and professional investors.

Success of McConchie-­Stroud system: The 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.

The company intends to initiate the development and operation of commercial facilities in several countries, predominantly by way of joint venture. The primary focus will be on Australia, U.S., China, Brazil and Southern Europe. The products will primarily be Biodiesel and Grade-­A Jet Fuel. Algae.Tec is establishing strategic partnerships and alliances with investors, venture partners, customers and

objectives.

Algae.Tec currently has MOUs with:

The Manildra Group for the first Australian plant Leighton Contractors for engineering and project management expertise Lufthansa Airlines to jointly evaluate for algae oil from bioreactors to be developed into a substantial source of aviation biofuels.

Joint Venture (JV) with Shandong Kerui Group to a 250-­module algae biofuels facility in China. After completion of the 250 module plant, the JV will look to secure funding to develop new projects exceeding 1,000 modules. They also target to engage with CO2 emitters in the Greater China region.

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.

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Algae.Tec Limited Arrowhead BID 6 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

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 for Shoalhaven Plant 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

demonstration plant. The plant is located at the Manildra facility situated at Nowra, south of Sydney. The Manildra 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

Mar 2011 Manufacturing plant operational in Atlanta Apr-­Aug 2011 Module fabrication in Atlanta

Aug 2011 Construction of Nowra commences

October 2011 Shipment of Modules from Atlanta

2012 Q1 Start-­up of Demonstration facility

Page 7: Algae.tec   abid report - 07 mar12

Algae.Tec Limited Arrowhead BID 7 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

News

Algae.Tec Joins OTCQX: On February 22, 2011, the company announced that its American Depositary Receipts (ADRs) will be traded on the highest tier of the OTC market, OTCQX. Algae.Tec began trading today on the OTC market's prestigious tier, OTCQX International. Investors can find current financial disclosure and Real-­Time Level 2 quotes for the Company on www.otcmarkets.com. INTL Trading, Inc. will serve as Algae.Tec's Principal American Liaison ("PAL") on OTCQX, responsible for providing guidance on OTCQX requirements

Algae.Tec Announces Standard and Poor s (S&P) Research Upgrade: On January 30, 2011, the company announced that Standard and Poors, in conjunction with the Company, upgraded the status of Algae.Tec's American Depository Receipt program (ADR), the USA share trading platform. S&P has commenced Factual Stock Report coverage on Algae.Tec providing financial data and analysis to key USA brokers, dramatically upgrading and extending the reach and profile of the Company in the USA investor community.

Algae.Tec Completes AU$5MM of Capital Raising: On January 22, 2011, the company announced that the AU$5MM Placement through Patersons Securities has been successfully completed. The capital raising will be used to fast-­track commercial projects the Company recently announced in China, Sri Lanka and Europe.

Algae.Tec forms joint venture with Shandong Kerui Group: On January 18, 2011, the company signed a binding memorandum of understanding for a 50:50 joint venture with Shandong Kerui Group Holding Limited. Shandong Kerui is a China-­based company engaged in the manufacturing of oilfield and petroleum industry equipment.

The joint venture will build 250-­module algae biofuels facility in China, in which both the partners will pay half to cover costs. The equally funded facility will be built in Dongying, in Shandong Province, and produce approximately 33MM liters of algae derived transport oil and approximately 33KT of biomass annually at a combined value of over US$40MM, and capture 137KT of waste carbon dioxide. The joint venture will allow Algae.Tec to expand its biofuels facilities throughout China.

Algae.Tec Announces AU$5MM Capital Raising: On January 18, 2011, the company announced that it mandated Patersons Securities to raise AU$5MM via the issue of 12.5MM shares at an issue price of 40c/share to sophisticated and professional investors. In conjunction with the shares, the company will also issue attaching options on the basis of one option for every two placement shares subscribed. The options will be American options with an exercise price of 75c and a maturity date at 31 January 2014. This capital raising via a placement will marginally increase the company's shareholder base by 4.7% and will be utilized to fund the fast tracking of the commercial projects recently announced.

Algae Tec Ltd Announces Conversion of La Jolla Convertible Note: On January 11, 2011, the company announced the issuance of 271,223 fully paid ordinary shares at AU$0.3687 each. The shares were issued to La Jolla Cove Subscribers Inc in relation to conversion of AU$100K of the La Jolla Convertible Note.

Algae.Tec Expands USA Commercial Production Facility for Asia and EU projects: On January 10, 2011, the company announced the expansion of its algae development & manufacturing centre in Atlanta, Georgia to accommodate commercial production programs. The Atlanta facility increased fourfold from 18,000 sq ft to 70,000 sq ft to scale up production capability

-­to-­ transport fuel development and manufacturing hub for the USA, Asia and Europe.

Change of Registered Office: On January 10, 2011, the company announced that it changed it

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Algae.Tec Limited Arrowhead BID 8 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Notice of General Meeting/Proxy Form: On December 22, 2011, the company announced that General meeting of shareholders will be held at 10:00am on 30th January 2012 at ground floor, 516 Hay Subiaco, WA 6008.

Algae.Tec and Lufthansa Sign MOU: On December 21, 2011, the company announced it signed a Memorandum of Understanding with Lufthansa Airlines to jointly evaluate for algae oil from

bioreactors to be developed into a substantial source of aviation biofuels.

Issue of 2,146,223 fully paid ordinary shares: On December 15, 2011, the company announced that it will issue fully paid ordinary shares to:

o 1,324,086 shares at 39.65c: issued to Empire equity limited in relation to services in arranging

o 535,845 shares at 36.95c: issued to Empire equity limited for services in arranging the $ 3,000,000 convertible note dated 12/12/2011 between company and La Jolla Cove Subscribers Inc

o 286,292 shares at 29.69: issued to La Jolla Cove Subscribers Inc in relation to conversion of $85,000 of the La Jolla Convertible Note.

$3,000,000 shares issued to La Jolla Cove Subscribers Inc: On December 13, 2011, the company announced that it will issue fully paid ordinary shares on conversion of a convertible note in the capital of the company valuing up to $3,000,000 and issued to La Jolla Cove Subscribers Inc under private placement to be on-­sold to retail investors

Algae.Tec to receive $6m in funding from La Jolla Cove: On December 08, 2011, the company announced that it received funding support from San Francisco based La Jolla Cove Investments with $6m in convertible notes to be drawn down over a three-­year period. The funding will allow Algae.Tec to fast-­track a number of strategic projects in Asia such as the Holcim Lanka biofuels and carbon capture facility;; projects in Europe;; and one global deal in particular.

Algae production plant in Shoalhaven on track: On December 07, 2011, the company announced that the work is on schedule for the Mar 2012 opening of the algae production plant in the Shoalhaven. The algae bio-­fuel plant will capture the carbon dioxide emissions from the Manildra plant in Nowra and use it to grow algae. The algae can then be used a number of different ways as a biofuel.

Holcim Lanka and Algae.Tec launch first biofuels production facility in Asia: On December 01, 2011, the company announced that it signed a collaboration contract with Holcim Lanka to build its first algae biofuels production facility in Asia. Algae.Tec offers a compelling carbon capture solution for carbon emitting companies and industries seeking carbon dioxide reduction technologies. Holcim Lanka was attracted to the Algae.Tec solution as a way of reducing its carbon footprint by channeling waste carbon dioxide into the algae growth system, and generating valuable biofuel at below market cost. The biofuels production facility will initially comprise a production plant of five photo-­bioreactor modules for evaluation purposes before potentially upgrading to a much larger facility. This plant will allow Holcim to evaluate the benefits of capturing more of the waste carbon dioxide in a much larger facility. It is expected that the Algae.Tec technology could be rolled out at other sites.

First Algae.Tec module shipped from USA to Australian production facility: On November 24, 2011, the company announced that the first photo-­bioreactor module has been shipped from the Algae Development & Manufacturing Centre in Atlanta, Georgia, for Australia. The shipment is one of five that will be delivered over the next few weeks for the Shoalhaven One Australian showcase facility at Nowra, South of Sydney, which has recently been granted permitting approval. The Algae.Tec enclosed modular technology captures carbon dioxide waste from power stations and manufacturing facilities, which feeds into the algae growth system. The enclosed modular system is designed to deliver the highest yield of algae per hectare, and solves the problem of food-­producing land being turned over for biofuel production. The company aims for biofuel production at Shoalhaven One in early 2012.

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Algae.Tec Limited Arrowhead BID 9 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Algae.Tec bioreactors receive approval for Australian facility: On October 18, 2011, the company announced that its demonstration plant, Shoalhaven One, received development approval under the Shoalhaven City Council Environment Planning and Assessment Act. The plant will be used to capture carbon dioxide waste from power stations and manufacturing facilities, feeding the pollution into the algae growth system. The permit is effective immediately, and after three years, Algae.Tec will have the option of expansion. Shoalhaven One will be sited next to the Manildra

meetings in China and Germany: On July 18, 2011, the company announced that its management returned from customer and site meetings in China and

sustainable fuels such as biodiesel and green jet fuel.

Algae.Tec technology uptake due to Australian price on carbon: On July 14, 2011, the company indicated that the introduction of a price on carbon by the Australian Government in its Clean Energy Future (CEF) package would accelerate uptake of the Algae.Tec technology by carbon dioxide emitting industries. The Algae.Tec enclosed modular technology captures carbon dioxide pollution from power stations and manufacturing facilities, which feeds into the algae growth system.

On July 08, 2011, the company announced that it producer, the Manildra Group, to construct a demonstration-­scale algae production facility in Nowra, NSW and the project could be operational by the first quarter of 2012. The company announced that Manildra is making several contributions to the project, including access to land and utilities.

regulations are met. The company intends to convert a percentage of the algae produced at the

algae feedstock will be converted into jet fuel and used for testing purposes in aircraft engines.

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-­on the USA OTC market on 28-­Apr-­2011.

Contacts

Registered office Ground floor, 516 Hay, Subiaco, WA 6008

Postal address PO box 2146, Subiaco, WA 6904

Telephone +61 (08) 9380 6790

Facsimilie +61 (08) 9381 9161

E-­mail [email protected]

Major Shareholdersv Equity Holder No. of Shares Held (MM) Percentage Holding

Teco. Bio 200.00 75.48% Mr. Peter Ernest Hatfull 9.66 3.64% FMR Investments Pty Ltd 5.00 1.89% Mcconchie Jeanette 2.40 0.91% Morrison Timothy 2.00 0.75% Tinkler Investments 1.61 0.61% Lawsons Company Pty Ltd 1.30 0.49% Chung Joseph 1.25 0.47% Hover Holdings Pty Ltd 1.25 0.47%

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Algae.Tec Limited Arrowhead BID 10 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 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 Apr 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.

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). He served as Global Director for chemicals and plastics in the latter part of his employment with Dow Chemical Company.

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. Prior to this appointment, he held senior financial and Board positions in Australia, Africa and the UK. He has experience in turnaround and slow growth situations, where companies have struggled to expand their business. This has required revitalizing 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 Board 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.

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Assets and Projectsvi vii viii ix

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 intends to initiate the development and operation of commercial facilities in several countries, predominantly by way of Joint Ventures with focus on Biodiesel and Grade-­A Jet Fuel. The company is building a demonstration facility with Manildra to prove its commercial viability.

The Algae Development & Manufacturing Centre in Atlanta has expanded from 18,200 sq ft to 70,000 sq ft in order to accommodate commercial production programs. The facility will be -­to-­transport fuel development and manufacturing hub for the USA, Asia and Europe.

In Nov 2011, the company shipped the first module from the Algae Development and Manufacturing Centre in Atlanta, Georgia in the United States and is headed for Australian shores development facility. The shipment is one of five that will be delivered over the next few weeks for the Shoalhaven One Australian showcase facility at Nowra, South of Sydney, which has recently been granted permitting approval. The company also announced that the work for the algae production plant in Shoalhaven is on schedule and the company aims for biofuel production at Shoalhaven One in early 2012.

The company produces high-­yield algae growth and harvesting technology through the

McConchie-­Stroud System. 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. primary focus has been directed towards microalgae as the most efficient photosynthesis species for bio-­fuels production.

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 Production of bio-­based polyolefin plastics.

Proteins High protein content algae biomass for the animal food market

Hydrocarbons Production of renewable distillates via gasification for substitution of diesel fuels.

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)

Corn 18 Soybeans 48 Safflower 83 Sunflower 102 Rapeseed 127 Jatropha 254 Oil Palm 635 Micro Algae 5,000-­15,000

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

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Depending on the geographic region, the 125Mtpa vegetable oil market (primarily, palm, soybean and rapeseed oils), representing AU$110B is growing between 3% and 5%.

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) have escalated approximately 14% per year over the past five years and the trend continues. x xi

Palm and Soyabean Oil Prices (US$/MT)

Source: www.indexmundi.com

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 approximately 5Mtpa, 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 60% to 80% of the vegetable oil prices, which is greater than AU$800/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. Continuous biodiesel production would get less expensive, more competitive and become more consumers friendly. 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 U.S.A. (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%-­20%. Biodiesel provides important environmental advantages, e.g., carbon dioxide sequestration, significantly reduced toxic exhaust emissions,

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.

Gasoline & Diesel Price Movements

Source: Energy Information Administration

0

200

400

600

800

1000

1200

1400

1600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Palm and Soyabean Oil Prices (US$/MT)

Soybean Oil Palm oil

00.51

1.52

2.53

3.54

4.55

2007 2008 2009 2010 2011 2012

Gasoline & Diesel Price Movements

Diesel Gasoline

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Crude Oil Prices

Source: Energy Information Administration

Jet Fuel

The company intends to initiate the development and operation of commercial facilities with primarily focus on Biodiesel and Grade-­A Jet Fuel. By 2015, we expect production capacity of bio-­diesel based Jet-­Fuel to reach 900 MGY.

Airlines, which burn some 25 BGY of fuel, have won regulatory approval for bio-­fuel that meets standards set by the benchmarking group ASTM International. On July 2011, Lufthansa became the first airline in the world to use a bio-­fuel mix on scheduled services. The carrier used a 50:50 mix between jet fuel and biosynthetic fuel sources from jatropha, camelina plants and animal fats made by Neste Oil and was used without any modifications to aircraft or its engines.

In 2010, companies like Choren, Rentech, and Solena Group had announced commercial projects that could result in hundreds of millions of gallons per year of production capacity coming online by 2014. There are a number of commercial hydroprocesing plants being built, most notably by Neste Oil and ConocoPhilips.

Glycerinexii

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 glycerine is over 1 Mtpa and continues to grow at 5% per annum. The current glycerine market

is approximately AU$900MM per 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 an 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$347/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.

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Technologies and Marketsxiii

Algae

Chemistry and Properties

Algae are 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 are 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 and

g 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 Opportunities

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. Algal bio-­fuels have matured significantly in the last few years, moving from small research labs, to pilot projects, to small scale demonstration projects, and now to first-­stage pre-­commercial trials for CO2 capture in a handful of projects.

Globally, the United States is poised to ramp up production the earliest amongst world markets,

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with 50% of all algae activity. The European Union (EU) market, accounting for about 30% of algae activity, will be limited initially by the

by insufficient access to water, land, and nutrient sources. It is believed that United States and Europe cannot grow enough corn, 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.

Algae command dominating position in renewable chemicals as algae is the only renewable feedstock which can scale realistically to compete with petroleum. 90% of crude oil

goes into fuel, but 40% of the profits come from petrochemicals. The world bio-­fuels market is expected to grow at a CAGR of 12%+ until 2017. Despite an economic downturn, environmental concerns and volatile crude oil prices continue to drive the algae bio-­fuel industry. The expected commercial timeline of Algal Bio-­fuels is shown in the chart:

Source: Algae 2020, Emerging Markets Online Consulting Services, Biofuel Digest

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.

McConchie-­Stroud System has achieved exceptional algae productivity and yields of algal products during the research and development phase due to the following:

Innovative Light System: Contains a novel lighting system for optimal provision of light for growth of algae.

Modular Reactor: Enables growth of algae to be easily controlled and optimized.

Controlled Environment: Enables a nutrient rich atmosphere for better algae growth.

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.

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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.

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-­ Photosynthesis bio-­reactor system controls the overall Modular Photo-­Reactors

Water Supply Seed 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

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Process Steps Process Description Key Unit Operations

Reactors productivity and desired product yields per species. Internal Light Distribution Network

Modular Infrastructure & Process Controls per Module Series

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.

Oil Extraction Units

Crude Algae Oil Treatment

Fatty Acid Co-­Product Recovery

Biomass Product Refinement

Downstream Products

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

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Project Risk Profile Analysis

Peer Risk Analysis

We have evaluated the risk profile of Algae.Tec compared with other biofuel players in Australia.

comparative ba 1.9based 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: Medium Secured $6MM financing

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%).

Peer Risk Profile

Ticker Total Risk Score

Project Stage Risk

Intellectual Property Risk

Financing Risk

Operational Risk

AEB 1.9 2.0 2.0 1.5 2.0

PALG 1.4 1.0 1.0 2.0 2.0

SZYM 1.2 1.0 1.0 1.0 2.0

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 MEDIUM The company is in its initial stages of development. It is building a demonstration facility and there is no guarantee that currently available funds will be sufficient for fulfilling the initial business objective, with a major portion

standing utilized. Algae.Tec will be required to raise additional funds in future and faces the risk of obtaining it on terms which are favorable to the company. Additionally, the funds may not be sufficient to enable the company to fully commercialize the McConchie Stroud System.

The funds raised through equity have been used for the establishment of a first class research and development and commercial facility. On 24th Nov, 2011, Algae.Tec Limited announced that first photo-­bioreactor module has been shipped from the Algae Development and Manufacturing Centre in Atlanta, Georgia in the United States. Company aims for biofuel production at Shoalhaven One in early 2012.

On 1st December 2011, Algae.Tec Limited announced that it signed a collaboration contract with Holcim Lanka Ltd. to develop its algae biofuel production facility in Sri Lanka. Holcim is investing in the plant to reduce its carbon footprint by channeling waste carbon dioxide into the algae growth system. Initially biofuel production facility will start off with five photo-­bioreactor modules but this could be expanded to a much larger facility should Holcim decide the facility is beneficial.

On 8th December 2011, Algae.Tec Limited announced that San Francisco-­based La Jolla Cove Investments has provided the company with $6m in convertible notes to be drawn down over three years. The additional funding will enable the Company to fast-­track a number of projects in Asia such as the Holcim Lanka biofuels and carbon capture facility and projects in Europe. In Jan 2012, the company comfortably raised AU$5m through Patersons Securities by issuing of 12.5m shares at an issue price of 40 cents per share to sophisticated and professional investors.

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. Algae.Tec recently

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signed a collaborative contract with Holcim Lanka Limited to develop its algae biofuel production plant in Sri Lanka. The Company has also entered into a Joint Venture with Shandong Kerui Group for a 250-­module algae biofuels facility in China. This signifies that McConchie-­Stroud system is commercially viable.

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 compaplans.

Operational Risks -­ MEDIUM

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 and environmental accidents, currency risk and industrial disputes.

Peer Profile

Parabel Inc. Parabel 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.

Parabel 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

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 sun's energy. By using standard industrial fermentation equipment, they are 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 100KT renewable oil production facility located at Bunge owned sugar cane mill in Brazil. Dynamic Fuels LLC has subcontracted the contract to supply the U.S. Navy with 450K gallons of renewable fuels to Solazyme Inc. As per the Navy and the USDA report this is the single largest purchase of biofuel in government history. The fuel will be used as part of the

composed of vessels and ships powered by biofuel.

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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 a relatively higher 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 a 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 from financing risk as the viability of the project is known only at a later stage, when half of the capital outlay is complete.

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

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 is available at lesser cost than its peers input and is available in abundance.

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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 Manildra

Biofuels Production Facility in Asia

Building a demo plant

IPO closed in December 2010 for AU$5m

Accepted for listing on Frankfurt Stock Exchange in Feb 2011

In Apr 2011 company announced its ADR

Placement of shares worth AU$5m through Patersons Securities

98.04 97.3

Algae.Tec is in its initial stages when compared to its peers. It is currently building a demo plant whereas Parabel has an operational demo plant and Solazyme has a fully commercial plant in place.

made along with Manildra, the largest Ethanol producer in Australia.

Algae.Tec signed a collaboration contract with Holcim Lanka Ltd. to build its first algae biofuels production facility in Asia.

Recently set up 70K sq. ft. Algae Development & Manufacturing Centre in Atlanta.

Secured funding support from San Francisco based La Jolla Cove Investments with $6MM in convertible notes to be drawn down over a three-­year period.

Parabel Inc. PALG

Ministry of Natural Resources for the Republic of Suriname

Biomass fuel test

Active Demo Plant in US

Currently managed by Private equity firms

676.85 696.0

Algae.Tec is in its developing stages while Parabel 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 May 2011 for $18 per share.

Joint 50:50 between the project partners

700.57 459.4

Algae.Tec is in its infant stage when compared to Solazyme, which has a functional commercial plant supplying fuel to US Navy.

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Algae.Tec Limited Arrowhead BID 22 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Value

The Fair Market Value for Algae.Tec shares stands between AU$305.3MM to AU$714.8MM.

The Fair Market Value for one of Algae.Tec publicly traded shares stands between AU$1.15 to AU$2.70.

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 4,753 14,363 23,781 24,891 83,512 105,422 128,041 Total Non-­Current Assets 22,615 38,353 36,244 34,250 32,367 30,587 28,904 TOTAL ASSETS 27,368 52,716 60,025 59,141 115,878 136,008 156,945 Total Current Liabilities -­ 2,399 3,670 3,743 3,818 3,895 3,972 Total Non-­current Liabilities 29,815 39,815 19,815 0 0 0 0 TOTAL LIABILITIES 29,815 42,214 23,485 3,743 3,818 3,895 3,972

(2,447) 10,502 36,540 55,398 112,060 132,114 152,972 TOTAL LIABILITIES and EQUITY 27,368 52,716 60,025 59,141 115,878 136,008 156,945 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/earnings 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

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

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analysis (one to twelve months). The reader should refer to important disclosures on page 25 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 ~123 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

The Manildra Group for the first Australian plant

Leighton Contractors for engineering and project management expertise

Joint Venture with Shandong Kerui Group to a 250-­module algae biofuels facility in China.

After the completion of 250 module plant, the JV will look to secure funding to develop new projects exceeding 1,000 modules. They also target to engage with CO2 emitters in the Greater China region.

Also, the company has inked a deal with Holcim Lanka Limited for developing its algae biofuel production facility in Sri Lanka for evaluation purpose, which can be expanded to much larger scale.

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. On 24th Nov 2011, the company reported that the first photo-­bioreactor module has been shipped from the Algae Development and Manufacturing Centre in Atlanta, Georgia in the United States and is headed for Australian shores. 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 Manildra -­ Algae.Tec Demo Plant before 2025.

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Algae.Tec Limited Arrowhead BID 24 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Key variables in Algae.Tec revenue estimations

Variable 1 Modules Constructed

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

-­related strategy.

2013 2014-­2020 2021-­2025

Low 250 375 625 High 300 625 750

Variable 2 Algae Production per Module

Arrowhead believes that the low and high estimates of cultivation of algae from one module are 225T and 250

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 950 1,080

Biomass 375 425

Fatty Acid (Other nutrients) 600 650

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$1000/T to AU$1200/T. We have assumed that algae oil would sell at a discount of around 10for bio diesel production.

Biomass can be substituted by high protein soybeans and corn which currently trade at AU$280/T and AU$500/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$650/T. We believe algae fatty acid output would fetch a similar price.

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Analyst Certifications and Important Disclosures

Analyst Certifications

I, Vishal Pasari, 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, 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 and 2012 from Algae.Tec Limited for researching and drafting this report and for a series of other services to Algae.Tec Limited, including distribution of this report and networking services. Certain Arrowhead BID partners and employees own long positions in Algae.Tec Limited equity.

Aside from certain reports published on a periodic basis, the large majority of reports are published by Arrowhead BID at irregular

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

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

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.

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Valuation

WACC Risk-­free rate 3.96% xiv

Production/ Module Algae Biomass Other

Beta 0.75 xv

Risk premium 4.5% xvi Max value

Refer to Key Variables section. Additional Risk Premium 1.0% xvii

Cost of Equity 8.1% xviii Min value Terminal Growth Rate 0% xix

FCFE (High) Time Period -­-­> 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net cash from operating activities (4,130) 16,914 42,470 58,357 59,253 60,249 61,490 62,331 63,193 Capital Expenditure (27,500) (22,000) (2,109) (1,993) (1,883) (1,780) (1,682) (1,589) (1,502) Net Debt Addition 29,815 10,000 (20,000) (19,815) -­ -­ -­ -­ -­ Free Cash Flow to Equity (1,815) 4,914 20,361 36,549 57,369 58,469 59,808 60,741 61,691 Discount Factor 0.98 0.91 0.84 0.78 0.72 0.66 0.62 0.57 0.53 Present Value of FCF (1,780) 4,459 17,094 28,388 41,227 38,874 36,790 34,569 32,483 FCFE (Low) Time Period -­-­> 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net cash from operating activities (4,130) 9,195 17,547 22,663 23,070 23,452 24,070 24,277 24,495 Capital Expenditure (25,000) (20,000) (1,918) (1,812) (1,713) (1,618) (1,529) (1,445) (1,366) Net Debt Addition 29,815 10,000 (20,000) (19,815) -­ -­ -­ -­ -­ Free Cash Flow to Equity 685 (805) (4,371) 1,036 21,358 21,834 22,541 22,832 23,129 Discount Factor 0.98 0.91 0.84 0.78 0.72 0.66 0.62 0.57 0.53 Present Value of FCF 672 (730) (3,669) 805 15,348 14,517 13,866 12,994 12,179

AU$/share Contribution by Key Variable

-­‐

0.50

1.00

1.50

2.00

2.50

3.00

Low Algae Oil Biomass OtherNutrients

High

ARROWHEAD FAIR VALUE BRACKET Terminal Value (TV) 921,233 460,726 Present Value of TV 415,216 207,657 Present Value of FCF + TV 713,962 304,503 + Cashxx 820 820 Equity Value Bracket 714,782 305,323 Shares Outstanding (in '000)xxi 264,976 264,976 Fair Value Bracket AUD 2.70 AUD 1.15 Current Market Price AUD 0.37 AUD 0.37 Current Market Capitals 98.0 98.0 Target Market Capital 714.8 305.3

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Algae.Tec Limited Arrowhead BID 27 OTCBB: ALGXY;; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.

Notes and References

i Arrowhead Business and Investment Decisions Fair Value Bracket -­ AFVBTM. See information on valuation on pages 24-­28 of this report and important disclosures on page 25 of this report

ii Source: Bloomberg -­ 07 Mar 2012 iii Source: Bloomberg -­ 07 Mar 2012 iv Source: Bloomberg 3 month volume 07 Mar 2012 v Source: Bloomberg 07 Mar 2012 vi Source: http://oakhavenpc.org/cultivating vii Source: http://oilprice.com/Alternative-­Energy/Biofuels/The-­Growing-­Market-­for-­Biodiesel-­and-­Bio-­Oils.html viii Source: http://www.tcbmag.com/peoplecompanies/companies/127267p1.aspx

ix Source: http://www.greentechmedia.com/articles/read/commercial-­jet-­fuel-­sooner-­than-­we-­think/

x Source: http://www.indexmundi.com/commodities/?commodity=soybean-­oil&months=120 xi Source: http://www.indexmundi.com/commodities/?commodity=palm-­oil&months=60 xii http://www.nyse.tv/crude-­oil-­price-­history.htm

xiii Source:http://www.emerging-­markets.com/algae/Algae2020StudyandCommercializationOutlook.pdf;; http://www.energybusinessreports.com/shop/item.asp?itemid=1450

xiv Source: Bloomberg -­ 07 Mar 2012 xv Arrowhead Estimates xvi Arrowhead Estimates xvii Arrowhead Estimates xviii Arrowhead Estimates xix Arrowhead Estimates xx As on Dec 31, 2011 xxi Source: Bloomberg -­ 07 Mar 2012


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