Algae.Tec abid report - 15 nov 2011

Due Diligence and Valuation Report

Arrowhead Code: 10-01-04Coverage initiated: 23 March 2011This document: 15 November 2011Fair share value bracket: AU$1.56 to AU$ 2.21i

Share price on date: AU$0.35ii

Company: Algae.Tec LimitedTicker: ASX:AEB, OTCBB:ALGXYHeadquarters: Perth, AustraliaExecutive Chairman: Mr. Roger Sydney StroudWebsite: www.algaetec.com.au

Analyst TeamThomas Renaud Rashmi [email protected] [email protected]+1 (212) 619 6889

Market Data52-Week Range: AU$0.17 to AU$0.67iii

Average Daily Volume: 15,180iv

Market Cap. on date: AU$87.12MM

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 63.0High EPS AU$ (2.76) 10.94 23.54 23.77 24.23 24.76 25.29Low profit/ (loss) MM (6.9) 17.9 39.0 39.4 40.2 41.1 42.1Low EPS AU$ (2.76) 7.18 15.66 15.83 16.15 16.53 16.90

Fiscal Year (FY)1stJuly – 30thJune

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 Manildra to prove its commercial viability, which is expected to be completed in Q1-2012.The company intends to initiate the development and operation of commercial facilities in several countries, predominantly by way of joint venture. The focus will be on Australia, U.S., China, Brazil and Southern Europe. The products will be primarily Biodiesel and Grade-A Jet Fuel. In addition, the company has recently set up the

18,200 square feet Algae Development & Manufacturing Centre in Atlanta where the photo-bioreactors will be assembled for shipping.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.

Algae.Tec Limited – Arrowhead BID 1 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 30 of this report.

mailto:[email protected]


http://www.algaetec.com.au/

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$1.56 to AU$2.21 bracket.

Table of Contents

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

News..........................................................................................................................8

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

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

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

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

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

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

Porter’s Five Force Analysis for the Biofuel industry in Australia.................................18

Project Risk Profile Analysis.......................................................................................19

Peer Profile...............................................................................................................20

SWOT Analysis..........................................................................................................23

Value........................................................................................................................24

Analyst certifications.................................................................................................27

Valuation..................................................................................................................28


Algae.Tec PresentationAlgae.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 current strategy of continuous improvement and adherence to quality control in existing markets, are expected to assist in the achievement of the consolidated group’s long term goal and development of new business opportunities.In August 2010, the Group announced the signing of a strategic relationship agreement with Pacific Minerals; a Hong Kong based Group, regarding the commercialization of its technology in China. The parties agreed to set up a joint venture company in China with the aim of identifying and progressing with commercial applications of its technology.In March 2011 Algae.Tec Limited announced the opening of its 18,000 sq ft facility in Atlanta Georgia. This facility is currently being used to build the first full size modules that will be established on the Manildra site in Nowra, NSW.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 building a demonstration facility with Manildra to prove its commercial viability, the first modules of which are being built in the in Atlanta facility, are on track to be shipped to the Nowra site in October 2011 and are expected to be operational in Q1-2012.

Algae.Tec’s Asset PortfolioAlgae.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. Algae.Tec’s primary focus has been directed toward microalgae as the most efficient photosynthesis species for bio-fuels production. The optimum selection of the algal species for bio-fuels production depends on the ability to sustain the culture (resilience and reliability); species growth rate; the biomass specific contents of lipids, carbohydrates and proteins (combined productivity); and the overall supporting photosynthesis environment. 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’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.– 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 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 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 SystemAlgae.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.

Algae.Tec’s Portfolio and Company RisksIntellectual 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: Inability to obtain additional financing may reduce company’s scope of 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. Also the company might not have sufficient funds to enable the company to fully commercialize the McConchie – Stroud System.


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 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. In August 2010, the Group announced the signing of a strategic relationship agreement with Pacific Minerals; a Hong Kong based Group, regarding the commercialization of its technology in China. The parties agreed to set up a joint venture company in China with the aim of identifying and progressing with commercial applications of its technology. 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 Manildra Group for the first Australian plant– Leighton Contractors for engineering and project management expertiseThe 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. The company has recently set up the 18,200 square feet Algae Development & Manufacturing Centre in Atlanta where the photo-bioreactors will be assembled for shipping to Shoalhaven Plant. 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 employed at Algae.Tec’s demonstration plant. The plant is located at the Manildra Group’s ethanol 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 MilestoneMarch 2011 Manufacturing plant operational in AtlantaApril-August 2011 Module fabrication in AtlantaAugust 2011 Construction of Nowra commencesOctober 2011 Shipment of Modules from Atlanta2012 Q1 Start-up of Demonstration facility

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.Products: Algae.Tec produces vegetable oil and a biomass of simple sugars and edible protein. Market prices as of September 2011, for crude vegetable oil was more than US$1,200/T and for biomass prices were more than US$500/T. Algae.Tec’s pilot plant studies have shown that McConchie-Stroud system is capable of delivering commercial projects of more than 1,000 modules which gives dry algae crop productivity of 250MT per container module. This works out to be a total manufacturing cash cost of approximately US$200/MT which is less than US$40/barrel.For more details, refer to the Technologies and Markets section


News– 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 Group’s industrial facility, south of Sydney, Australia.

– Algae.Tec’s customer and site meetings in China and Germany: On July 18, 2011, the company announced that its management returned from customer and site meetings in China and Germany where there is interest in Algae.Tec’s ability to produce algae as feedstock to manufacture 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.

– Algae.Tec’s demonstration to be collocated at Australian ethanol plant: On July 08, 2011, the company announced that it signed a collaboration contract with Australia’s largest ethanol 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. Algae.Tec’s role in the project is to build the demonstration plant, and ensure safety and site regulations are met. The company 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 Manildra 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 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 InformationAlgae.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.

ContactsRegistered office: Suite 9, 3 Centro Avenue, Subiaco, WA, Australia, 6008Telephone: +61 (08) 9380 6790Email: [email protected]

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

Teco. Bio 200.00 80.35%Mr Peter Ernest Hatfull 9.61 3.86%Fmr Investments Pty Ltd 5.00 2.01%Moltoni Corporation Pty Ltd 4.38 1.76%Mcconchie Jeanette 2.40 0.96%Morrison Timothy 2.00 0.80%Chung Joseph 1.25 0.50%Hover Holdings Pty Ltd 1.25 0.50%Source: Bloomberg – 14 November 2011



Management and GovernanceThe management team at Algae.Tec comprises experienced professional with a proven track record.

Mr. Roger Sydney Stroud Executive ChairmanMr. 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 DirectorMr. 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 SecretaryMr. 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 DirectorMr. 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.


Assets and Projectsvviviiviiiixx

OverviewAlgae.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 venture with focus on Biodiesel and Grade-A Jet Fuel. The company is building a demonstration facility with Manildra to prove its commercial viability, the first modules of which are being built in the in Atlanta facility, are on track to be shipped to the Nowra site in October 2011 and are expected to be operational in Q1-2012.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. Algae.Tec’s 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 industryRefined glycerine produced via algae-biodiesel productionSpecialty oils and fatty acids.

Carbohydrates Substitution of agricultural sourced feedstocks for conversion of carbohydrates (sugars) to bio-ethanolProduction 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 fuelsConversion of residual biomass following oil extraction to

Algae Products End-Use Markets

renewable distillates.Biomass nutrients suitable for use in agricultural fertilizers

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

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.


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Fatty AcidAnother 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 50% to 70% of the vegetable oil prices, which is greater than AU$500/T on an average.BiodieselMost 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, 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.

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008

Feb

03, 2

009

May

03,

200

9

Aug 0

3, 2

009

Nov

03, 2

009

Feb

03, 2

010

May

03,

201

0

Aug 0

3, 2

010

Nov

03, 2

010

Feb

03, 2

011

May

03,

201

1

Aug 0

3, 2

011

Crude Oil Prices

Sources: Energy Information Administration – U.S. Department of Energy (EIA-DOE), U.S. Department of Agriculture (USDA) Jacobsen

Jet FuelThe 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. GlycerineGlycerine 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.BiomassAlgae 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. EthanolEthanol 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.



Technologies and Marketsxi

AlgaeChemistry and PropertiesAlgae 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.MicroalgaeStudies 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 SourcesShooting 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 OpportunitiesThe 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, 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, 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. 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 growing of algae.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 ProductionAlgae 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-TreatmentWater RecycleGas Distribution NetworkRecovery of Module Off-Gas

Light Energy Supply

Solar energy in the form of visible light absorbs and converts CO2 to produce algae.

Solar CollectionVisible Light Filtration & DistributionEnergy 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 ControlNutrient Preparation UnitMake-up Algae Control System

Modular Photo-Reactors

Photosynthesis bio-reactor system controls the overall productivity and desired product yields per species.

Modular Photo-ReactorsInternal Light Distribution NetworkModular 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 HandlingMechanical Separation UnitsAlgae Biomass Refinement

Product Algae biomass contains predominantly lipids (fats/oils) Oil Extraction Units


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

Process Steps Process Description Key Unit Operations

Refinement

and carbohydratesConventional 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.

Crude Algae Oil TreatmentFatty Acid Co-Product RecoveryBiomass 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 TransesterificationBiomass Animal Food ProductsEthanol ProductionMiddle Distillates ProductionPower Generation via Biomass Gasification


Porter’s Five Force Analysis for the Biofuel industry in Australia

OverviewAustralia’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 Manildra-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 scientific expertise• Patented Technologies • Economic Viability of new

technologies

Power of Customers Low

Customer base is spreadacross industr ies – 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

• Engineer ing 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

Project Risk Profile AnalysisPeer Risk AnalysisWe 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 “2” 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: Medium – Commercialization

of Technology yet to be done– Operational Risk: Medium – dependent on

technology usedThe 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

TickerTotal Risk

Score

Project Stage Risk

Intellectual Property

RiskFinancing

RiskOperational

Risk

AEB 2 2 2 2 2PALG 1.4 1 1 2 2SZYM 1.2 1 1 1 2

Intellectual Property Risk - MEDIUMThe 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. 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, with a major portion standing utilized. 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 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 17 March 2011, Algae.Tec Limited announced the opening of its 18,000sq ft facility in Atlanta Georgia. 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 - HIGHThe 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 - MEDIUMThe 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- MEDIUMThe 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 and environmental accidents, currency risk and industrial disputes.

Peer ProfilePetroalgae 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 100,000MT renewable oil production facility located at Bunge owned sugar cane mill in Brazil.



Risk Parameters – Definition

Project Stage RiskArrowhead 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 RiskThe 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 RiskThe 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 riskDepending 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.



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

Building a demo plant

IPO closed in December 2010 for AU$5m1

Accepted for listing on Frankfurt Stock Exchange in February 2011In April 2011 company announced its ADR

87.12 84.69

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 Manildra, the largest Ethanol producer in Australia.Algae.Tec has also received recognition from aviation industry for its fuel demo plant with Manildra.

PetroAlgae PALG

Ministry of Natural Resources for the Republic of SurinameBiomass fuel test

Active Demo Plant in US

IPO underwayCurrently managed by Private equity firms

757.93 817.41

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 VenturesMarine Diesel fuel for US NAVYRenewable chemicalsNutrition productsSkincare Products

Commercial Plant

IPO in 2011 in May 2011 for $18 per share.Joint – 50:50 between the project partners

661.74 425.14

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

1 The IPO issue closed in December 2010 once the minimum of AU$5 million and 500 shareholders had been achieved. Shares were issued at AU$0.20 with 28.35MM receiving quotation. With another 219.58MM shares being issued to original founders and seed investors which were subject to restriction agreements, the total shares on issue post listing were 247.92MM and giving a market capitalization at listing of AU$49.58MM. By October 2011 the shareholders have grown to approximately 750 and the market capitalization to approximately AU$90 million, a very positive result in a very negative market period.


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

ValueThe 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 differentlyLow bracket estimates

year ending June 30 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Total Current Assets 3,741 19,797 63,839 106,195 149,205 193,000 237,589Total Non-Current Assets 29,815 55,633 52,574 49,682 46,949 44,367 41,927TOTAL ASSETS 33,556 75,430 116,413 155,877 196,154 237,367 279,516Total Current Liabilities - 1,603 3,598 3,670 3,743 3,818 3,895Total Non-current Liabilities 22,400 44,800 44,800 44,800 44,800 44,800 44,800TOTAL LIABILITIES 22,400 46,403 48,398 48,470 48,543 48,618 48,695Total Shareholders’ Equity 11,156 29,027 68,014 107,407 147,611 188,749 230,822TOTAL LIABILITIES and EQUITY 33,556 75,430 116,412 155,877 196,154 237,367 279,516

Important information on Arrowhead methodologyThe 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 BracketThe 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 analysis (one to twelve months). The reader should refer to important disclosures on page 30 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 ~128 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 Manildra Group for the first Australian plant– Leighton Contractors for engineering and project management expertiseThe 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 Manildra - Algae.Tec Demo Plantbefore 2021.


Key variables in Algae.Tec revenue estimations

Variable 1 – Modules ConstructedArrowhead 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.

2013 2014-2020 2021-2025Low 250 550 650High 300 650 700

Variable 2 – Algae Production per ModuleArrowhead 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 PricesArrowhead 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 1,225Biomass 375 425Fatty 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.


Analyst Certifications and Important Disclosures

Analyst CertificationsThis 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 DisclosuresArrowhead Business and Investment Decisions, LLC received fees in 2011 from Algae.Tec for researching and drafting this report and for a series of other services to Algae.Tec, 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.

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ValuationWACCRisk-free rate 4.21% xii Production/

Module Algae Biomass OtherBeta 0.80 xiii

Risk premium 6.0% xiv Max value 225 1175 375 400

Additional Risk Premium 1.0% xv

Cost of Equity 9.8% xvi Min value 250 1225 425 450

Terminal Growth Rate 0% xvii

FCFE (High) Time Period --> 0.83 1.8

3 2.8

3 3.

83 4.8

3 5.8

3 6.8

3 7.8

3 8.832012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net cash from operating activities (3,759) 20,251 48,899 64,690 65,529 66,560 67,615 68,696 69,804

Capital Expenditure (33,000) (32,000) (2,782) (2,629) (2,484) (2,347) (2,218) (2,096) (1,981)

Net Debt Addition 22,400 22,400 - - - - - - -

Free Cash Flow to Equity (14,359) 10,651 46,117 62,062 63,045 64,212 65,397 66,600 67,823

Discount Factor 0.86 0.78 0.71 0.65 0.59 0.54 0.49 0.45 0.41

Present Value of FCF (12,310) 8,325 32,865 40,324 37,347 34,682 32,204 29,902 27,764

FCFE (Low) Time Period -->2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net cash from operating activities (3,759) 14,825 33,582 44,913 45,420 46,067 46,732 47,415 48,116

Capital Expenditure (33,000) (32,000) (2,782) (2,629) (2,484) (2,347) (2,218) (2,096) (1,981)

Net Debt Addition 22,400 22,400 - - - - - - -

Free Cash Flow to Equity (14,359) 5,225 30,800 42,284 42,936 43,720 44,513 45,318 46,135

Discount Factor 0.86 0.78 0.71 0.65 0.59 0.54 0.49 0.45 0.41

Present Value of FCF (12,310) 4,084 21,949 27,474 25,435 23,614 21,920 20,347 18,886

ARROWHEAD FAIR VALUE BRACKET

High LowTerminal Value (TV) 766,365 568,843Present Value of TV 257,206 190,914Present Value of FCF + TV 538,160 378,702+ Cashxviii 2,413 2,413Equity Value Bracket 540,573 381,116Shares Outstanding (in '000)xix 248,922 248,922Fair Value Bracket AUD 2.17 AUD 1.53Current Market Price AU$0.35 AU$0.35Current Market Capitals 87.1 87.1Target Market Capital 540.6 381.1

AU$/share Contribution by Key Variable


-

0.50

1.00

1.50

2.00

2.50

Low Algae Oil Biomass Other Nutrients

High


Notes


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 27 of this report

ii Source: Bloomberg - 15-November-2011iii Source: Bloomberg - 15-November-2011iv Source: Bloomberg 3 month volume – 15-November-2011v Source: http://oakhavenpc.org/cultivatingvi Source: http://www.indexmundi.com/commodities/?commodity=soybean-oil&months=120vii Source: http://www.indexmundi.com/commodities/?commodity=palm-oil&months=60viii Source: http://oilprice.com/Alternative-Energy/Biofuels/The-Growing-Market-for-Biodiesel-and-Bio-Oils.html

ix Source: http://www.tcbmag.com/peoplecompanies/companies/127267p1.aspxx Source: http://www.greentechmedia.com/articles/read/commercial-jet-fuel-sooner-than-we-think/xi Source:http://www.emerging-markets.com/algae/Algae2020StudyandCommercializationOutlook.pdf;

http://www.energybusinessreports.com/shop/item.asp?itemid=1450xii Australian Government 10 year bond yield from Bloomberg as on 15-November-2011xiii Arrowhead Estimatesxiv Arrowhead Estimatesxv Arrowhead Estimatesxvi Arrowhead Estimatesxvii Arrowhead Estimatesxviii June 30, 2011xix Management comment

http://oilprice.com/Alternative-Energy/Biofuels/The-Growing-Market-for-Biodiesel-and-Bio-Oils.html

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Algae.Tec abid report - 15 nov 2011

Investor Relations