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Due  Diligence  and  Valuation  Report                                                                                    ...
Table  of  Contents    Algae.Tec  Presentation  .............................................................................
Company  Presentation  Algae.Tec  is  an  Australian  biofuel  company  focused  on  commercializing  technology  that  pr...
dark   phase   reactions   to   biologically   produce   primarily   lipids,   carbohydrates   and   proteins     subseque...
approximately   33MM   liters   of   algae   derived   transport   oil   and   33KT   of   biomass   annually   at   a    ...
The   company   is   currently   in   the   process   of   scaling   up   the   technology   to   the   next   phase   of ...
News       Algae.Tec   Joins   OTCQX:   On   February   22,   2011,   the   company   announced   that   its   American   ...
Notice   of   General   Meeting/Proxy   Form:   On  December  22,  2011,  the  company  announced  that       General  mee...
Algae.Tec   bioreactors   receive   approval   for   Australian   facility:   On   October   18,   2011,   the       compa...
Management  and  Governance  The  management  team  at  Algae.Tec  comprises  experienced  professional  with  a  proven  ...
                                                                                             McConchie-­Stroud   System.  ...
Depending   on   the   geographic   region,   the                                               fatty   acids   is   relat...
Crude  Oil  Prices                                                          is   approximately   AU$900MM   per   year   a...
                                                                              Blue-­Green   Algae      They   are   found ...
with   50%   of   all   algae   activity.   The   European                   goes  into  fuel,  but  40%  of  the  profits...
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
Algae.tec   abid report - 07 mar12
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Algae.tec abid report - 07 mar12

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Transcript of "Algae.tec abid report - 07 mar12"

  1. 1. Due  Diligence  and  Valuation  Report      Arrowhead  Code:     10-­01-­06        Coverage  initiated:     23  Mar  2011    This  document:     07  Mar  2012   Company:   Algae.Tec  Limited  Fair  share  value  bracket:   AU$1.15  to  AU$2.70i   Ticker:   ASX:AEB,  OTCBB:ALGXY  Share  price  on  date:     AU$0.37ii   Headquarters:   Perth,  Australia  Analyst  Team   Executive  Chairman:   Mr.  Roger  Sydney  Stroud  Vishal  Pasari                                                               Rashmi  Shah  vishal.pasari@arrowheadbid.com rashmi.shah@arrowheadbid.com   Website:   www.algaetec.com.au   biofuels   facility   in   China.   The   JV   will   be   an  Market  Data   equally   funded   facility   to   producing   algae  52-­Week  Range:   AU$0.29  to  AU$0.63iii   derived   transport   oil   and   biomass   of   over  Average  Daily  Volume:   268,135iv   $40MM   and   capturing   137KT   of   waste   carbon  Market  Cap.  on  date:   AU$98.04MM   dioxide.   The   Company   has   collaborations   with   Holcim  Financial  Forecast  Data  (in  AU$)   Lanka   Ltd.   to   develop   its   first   algae   biofuel               16E       production  plant  in  Sri  Lanka  and  with  Lufthansa   High  profit/   (6.7)   25.6   52.7   54.2   55.3   56.5   58.0   (loss)  MM   bioreactors   as   a   substantial   source   of   aviation   High  EPS   biofuels.     (2.52)   9.68   19.09   19.61   16.97   17.34   17.79   AU$   Low  profit/   In   Jan   2012,   Algae.Tec   raised   $5.0MM   via   (6.4)   12.9   17.6   18.9   19.5   20.1   20.9   (loss)  MM   12.5MM   shares   at   an   issue   price   of   40c/share   Low  EPS   (2.43)   4.89   6.37   6.83   5.98   6.16   6.40   through   Patersons   Securities.   In   Dec   2011,   AU$   Algae.Tec   secured     funding   support   from   San   Francisco   based   La   Jolla   Cove   Investments   with  Fiscal  Year  (FY)                                    1st  July    30th  June $6m  in  convertible  notes  to  be  drawn  down  over   a  three-­year  period.  Summary     In   Jan   2012,   S&P   commenced   Factual   Stock  Algae.Tec   Limited   is   involved   in   the   production   Report   coverage   on   Algae.Tec,   upgrading   and  of   algae   to   manufacture   sustainable   fuels   such   extending  the  reach  and  profile  of  the  Company  as  biodiesel  and  green  jet  fuel.  Management  has   in  the  USA  investor  community.  core   competencies   in   biofuel   technologies,  energy   markets,   project   commercialization   and   Algae.Tec   tapped   into   international   capital  business  management.   markets   with   a   public   offer   and   listed   on   the   Australian   Stock   Exchange   and   Frankfurt   Stock  Algae.Tec   developed   the   McConchie-­Stroud   Exchange.   On   Feb   22nd  System,   which   cultivates   and   economically   American  Depositary  Receipts  started  trading  on  harvests   high   yield   algae.   The   technology   the  highest  tier  of  the  OTC  market,  OTCQX.  provides  competitive  advantages  in  terms  of  low  capital   and   operating   costs,   minimal   The   global   market   for   algae   is   poised   for  requirement  of   land,  low  water  evaporation   and   explosive   growth   in   the   next   10   years;;   demand  better   recycling   of   water   amongst   other   is   expected   to   reach   61MM   gallons/year   of   bio-­specifics.   The   company   is   now   building   a   fuel   and   a   market   value   of   AU$1.3B   by   2020  demonstration   facility   with   Manildra   to   prove   representing   a   CAGR   of   72%,   roughly   on   par  commercial  viability  of  the  System.     with  early  development  in  the  biodiesel  industry.  The   company   intends   to   initiate   the   Arrowhead   believes   that   Algae.Tec   has  development   and   operation   of   commercial   enormous   growth   potential   with   a   medium   risk  facilities   in   Australia,   U.S.,   Brazil   and   Southern   profile.  Based  on  intrinsic  revenue  capacity  from  Europe   predominantly   by   way   of   Joint   Venture   500   modules,   Arrowhead   believes   that   the  (JV).   The   products   will   be   primarily   Biodiesel   AU$1.15  and  Grade-­A  Jet  Fuel.     to  AU$2.70  bracket.  In  Jan  2012,  the  company  entered  into  a  JV  with  Shandong   Kerui   Group   to   a   250-­module   algae    Algae.Tec  Limited    Arrowhead  BID   1 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  2. 2. Table  of  Contents    Algae.Tec  Presentation  .....................................................................................................     3News  .................................................................................................................................     7Listing  Information  ...........................................................................................................     9Contacts  ............................................................................................................................     9Major  Shareholders  ...........................................................................................................     9Management  and  Governance  .........................................................................................     10Assets  and  Projects        .......................................................................................................     11Technologies  and  Markets   ..............................................................................................     . 14Project  Risk  Profile  Analysis   ............................................................................................     18Peer  Profile  .....................................................................................................................     19Value   ..............................................................................................................................     . 22Analyst  Certifications  and  Important  Disclosures............................................................     25Valuation   .........................................................................................................................     26  Algae.Tec  Limited    Arrowhead  BID   2 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  3. 3. 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  Algae.Tec  Limited    Arrowhead  BID   3 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  4. 4. 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  Algae.Tec  Limited    Arrowhead  BID   4 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  5. 5. 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.    Algae.Tec  Limited    Arrowhead  BID   5 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  6. 6. 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:   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  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.  Algae.Tec  Limited    Arrowhead  BID   6 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  7. 7. 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  markets  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.Tecs   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.Tecs  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   companys   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    Algae.Tec  Limited    Arrowhead  BID   7 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  8. 8. 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.  Algae.Tec  Limited    Arrowhead  BID   8 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  9. 9. 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   phatfull@algaetec.com.au  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%  Algae.Tec  Limited    Arrowhead  BID   9 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  10. 10. 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.  Algae.Tec  Limited    Arrowhead  BID   10 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  11. 11.   McConchie-­Stroud   System.   System   is   designed  Assets  and  Projectsvi  vii  viii  ix   to   cultivate   algae   virtually   anywhere,   including   marginal   land   or   industrialized   areas.   The  Overview   system   is   designed   for   scalability   and   minimal  Algae.Tec   is   focused   on   commercializing   land   footprint   and   water   usage.  technology   that   produces   algae   at   a   very   fast   primary   focus   has   been   directed   towards  rate,   to   manufacture   sustainable   algae   oil   microalgae   as   the   most   efficient   photosynthesis  (which   is   further   used   to   produce   vegetable   oil,   species  for  bio-­fuels  production.  biodiesel   and   refined   glycerine),   biomass   (used   Algae  Products   End-­Use  Markets  to  produce  animal  protein  feed,  bio-­ethanol  and   Lipids/Oils   Algae   oil   substitution   of   vegetable  renewable   distillates)   and   other   nutrients   such   oil   feedstocks   (e.g.   soybean   oil,  as   fatty   acids.   The   company   intends   to   initiate   palm  oil)  for  biodiesel  industry  the   development   and   operation   of   commercial   Refined   glycerine   produced   via  facilities   in   several   countries,   predominantly   by   algae-­biodiesel  production  way   of   Joint   Ventures   with   focus   on   Biodiesel   Specialty  oils  and  fatty  acids.  and  Grade-­A  Jet  Fuel.  The  company  is  building  a   Carbohydrates   Substitution   of   agricultural   sourced  demonstration  facility  with  Manildra  to  prove  its   feedstocks   for   conversion   of  commercial  viability.     carbohydrates   (sugars)   to   bio-­ ethanol    The  Algae  Development  &  Manufacturing  Centre   Production   of   bio-­based   polyolefin  in   Atlanta   has   expanded   from   18,200   sq   ft   to   plastics.  70,000   sq   ft   in   order   to   accommodate  commercial   production   programs.   The   facility   Proteins   High  protein  content  algae  biomass   for  the  animal  food  market  will   be   -­to-­transport   fuel  development   and   manufacturing   hub   for   the   Hydrocarbons   Production   of   renewable   distillates  USA,  Asia  and  Europe.     via   gasification   for   substitution   of   diesel  fuels.  In   Nov   2011,   the   company   shipped   the   first   Biomass   Feedstock  source  for  biomass  module   from   the   Algae   Development   and   power  generation  with  Substitution  Manufacturing   Centre   in   Atlanta,   Georgia   in   the   of  fossil  fuels  United   States   and   is   headed   for   Australian   Conversion  of  residual  biomass  shores   development   facility.   The   shipment   is   following  oil  extraction  to  one   of   five   that   will   be   delivered   over   the   next   renewable  distillates.  few   weeks   for   the   Shoalhaven   One   Australian   Biomass  nutrients  suitable  for  use   in  agricultural  fertilizers  showcase   facility   at   Nowra,   South   of   Sydney,  which   has   recently   been   granted   permitting   Vegetable  Oil  approval.  The  company  also  announced  that  the  work   for   the   algae   production   plant   in   Microalgae   such   as   higher   plants   produce  Shoalhaven   is   on   schedule   and   the   company   storage   lipids   in   the   form   of   triacyglycerols.  aims   for   biofuel   production   at   Shoalhaven   One   Comparatively,  algae  produce  more  oil  than  any  in  early  2012.     other   oilseeds   which   are   currently   in   use.   Many   Algae  Oil Vegetable  Oil  Market microalgae   species   can   be   induced   to   Biodiesel Biodiesel  Market accumulate  substantial  quantities  of  lipids,  often   Algae  Oil greater  than  60%  of  their  biomass.     Refined   Glycerine Market Glycerine The   table   below   presents   indicative   oil   yields   from  various  oilseeds  and  algae.   CO2 Animal   Animal  Feed  Market Nutrients Protein  Feed Yields  (Gallons  of  oil  per  acre  per  year)   Algae   Ethanol   Market Biomass Water Production Bio-­Ethanol Corn   18   Renewable   Chemicals Distillates Diesel  Fuel  Market Soybeans   48   Safflower   83   Sunflower   102   Fatty  Acids Fatty  Acid  Market Rapeseed   127   Jatropha   254  The   company   produces   high-­yield   algae   growth   Oil  Palm   635  and   harvesting   technology   through   the   Micro  Algae   5,000-­15,000  Algae.Tec  Limited    Arrowhead  BID   11 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  12. 12. Depending   on   the   geographic   region,   the   fatty   acids   is   related  to   the   growth   in   vegetable  125Mtpa   vegetable   oil   market   (primarily,   palm,   oils  and  economy  of  the  region.    soybean   and   rapeseed   oils),   representing   The  current  fatty  acid  prices  range  from  60%  to  AU$110B  is  growing  between  3%  and  5%.   80%  of  the  vegetable  oil  prices,  which  is  greater   than  AU$800/T  on  an  average.  Approximately  80%  of  the  vegetable  oil  demand  is   for   the   food   market,   and   consumer   products   Biodiesel  and   feedstock   for   biodiesel   production   account   Most   research   into   efficient   algal-­oil   production  for  approximately  25Mtpa  of  the  total  demand.     predicts   that   biodiesel   may   be   the   only   viable  Vegetable   oil   prices   have   historically   followed   method   to   produce   enough   automotive   fuel   to  agricultural  supply/demand  balances,  population   replace   current   world   diesel   usage.   Continuous  growth   and   standard   of   living;;   however,   crude   biodiesel  production  would  get  less  expensive,  oil   pricing   has   also   significantly   influenced   more   competitive   and   become   more  vegetable  oil  prices.  Soybean  and  palm  oil  prices   consumers   friendly.   Current   biodiesel  (see  chart   below)   have   escalated   approximately   consumption   represents   approximately   1%   of  14%   per   year   over   the   past   five   years   and   the   the  total  vehicular  diesel  fuel  demand  globally  at  trend  continues.  x  xi     12.5B   liters   per   year.   Europe   is   by   far   the   Palm  and  Soyabean  Oil  Prices  (US$/MT)   largest   biodiesel   market   (approximately   80%   of   the   global   market),   followed   by   the   U.S.A.   Palm  and  Soyabean  Oil  Prices  (US$/MT) (approximately  15%  of  the  global  market).     1600 1400 Biodiesel   is   registered   and   used   as   a   direct   1200 diesel   fuel   substitute   and   fuel   additive,   which   is   1000 most   often   marketed   in   blends   of   5%-­20%.   800 Biodiesel   provides   important   environmental   600 advantages,   e.g.,   carbon   dioxide   sequestration,   400 significantly   reduced   toxic   exhaust   emissions,   200 0 transportation   fuel.   There   are   more   than   500   2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 biodiesel  manufacturing  plants  worldwide  with   a   Soybean  Oil Palm  oil   total   in-­place   production   capacity   of   37B   liters   Source:  www.indexmundi.com   per  year.  Fatty  Acid   The   price   of   biodiesel   is   primarily   driven   by   the   following  factors:    Another   very   useful   form   of   algae   is   fatty   acid.  Fatty   acid   is   a   viscous,   gum-­like   substance,   The  crude  oil-­derived  diesel  market  derived   from   algae.   It   is   also   a   very   important   The  level  of  government  subsidy  and,  ingredient   in   the   manufacturing   of   papers   and   The  price  of  biodiesel  feedstock.  textiles.   As   it   possesses   most   of   the   properties    of  gum,  it  is  also  used  in  the  water-­proofing  and  fire-­proofing  industry.     Gasoline  &  Diesel  Price  Movements  It  is  especially  helpful  in  making  fabrics  that  are   Gasoline  &  Diesel  Price  Movementsfire   and   water   resistant.   In   the   pharmaceutical   5 4.5industry,   it   is   used   in   the   manufacture   of   4Gaviscon,   Asilone,   Bisodol   etc.   It   is   used   as   a   3.5mould-­making   material   in   life   casting,   3prosthetics  and  dentistry.  Like  most  of  the  forms   2.5 2or   products   of   algae,   alginic   acid   is   used   1.5extensively  in  the  food  processing  industry  as  an   1ingredient  of  soups  and  jellies.   0.5 0The   world   production   of   fatty   acids   from   the   2007 2008 2009 2010 2011 2012 Diesel Gasolinehydrolysis  of   natural  fats  and  oils  aggregates  to     Source:  Energy  Information  Administration  approximately   5Mtpa,   which   represents   an  AU$3B   per   year   market.   The   consumption   of  Algae.Tec  Limited    Arrowhead  BID   12 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  13. 13. Crude  Oil  Prices   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   Source:  Energy  Information  Administration     carbohydrates,  proteins  and  hydrocarbons.  Jet  Fuel   The   animal   feed   market   is   an   180Mtpa   market  The   company   intends   to   initiate   the   (AU$80B   per   year).   The   primary   source   for  development   and   operation   of   commercial   animal   protein   feed   in   the   U.S.   is   high   protein  facilities   with   primarily   focus   on   Biodiesel   and   soybean  meal,  currently  priced  at  approximately  Grade-­A   Jet   Fuel.   By   2015,   we   expect   AU$347/T.  The  residual  algae  biomass  with  high  production   capacity   of   bio-­diesel   based   Jet-­Fuel   carbohydrate   and   protein   contents   offers   a  to  reach  900  MGY.     direct   substitute   for   agricultural-­based   protein   sources.    Airlines,   which   burn   some   25   BGY   of   fuel,   have  won   regulatory   approval   for   bio-­fuel   that   meets   Ethanol  standards  set  by  the  benchmarking  group  ASTM   Ethanol   from   algae   is   produced   by   converting  International.   On   July   2011,   Lufthansa   became   starch   (the   storage   component)   and   cellulose  the  first  airline  in  the  world  to  use  a  bio-­fuel  mix   (the   cell   wall   component).   Lipids   in   algae   are  on  scheduled  services.  The  carrier  used  a  50:50   converted   into   biodiesel,   while   the  mix   between   jet   fuel   and   biosynthetic   fuel   carbohydrates   are   converted   to   ethanol.   Algae  sources   from   jatropha,   camelina   plants   and   are   the   optimal   source   for   second   generation  animal   fats   made   by   Neste   Oil   and   was   used   bio-­ethanol  due  to  the  fact  that  they  are  high  in  without   any   modifications   to   aircraft   or   its   carbohydrates/polysaccharides  and  thin  cellulose  engines.     walls.  In   2010,   companies   like   Choren,   Rentech,   and   The   total   global   bio-­ethanol   consumption   is  Solena   Group   had   announced   commercial   approximately   70B   liters   (55Mtpa)   and  projects  that  could  result  in  hundreds  of  millions   represents   an   AU$35B   biofuel   market   per   year.  of   gallons   per   year   of   production   capacity   Bio-­ethanol   demand   is   set   to   double   over   the  coming   online   by   2014.   There   are   a   number   of   next   20   years.   Ethanol   prices   correlate   highly  commercial   hydroprocesing   plants   being   built,   with   ex-­rack   gasoline   with   current   prices   at  most  notably  by  Neste  Oil  and  ConocoPhilips.     AU$650/T.  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    Algae.Tec  Limited    Arrowhead  BID   13 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  14. 14.   Blue-­Green   Algae     They   are   found   in  Technologies  and  Markets   xiii freshwater  and  marine  environment  habitats   and  play  an  important  role  in  fixing  nitrogen   from  the  atmosphere.    Algae   Golden  Algae    Golden  algae  primarily  exists  Chemistry  and  Properties   in  freshwater  systems.  They  are  very  similar  Algae   are   a   group   of   aquatic   estuarine   and   to   diatoms   but   have   more   complex   pigment  marine   plant   organisms,   which   may   range   from   systems.  microscopic   (microalgae)   to   many   meters   in  length.   They   range   from   small   single   celled   Algae  as  Energy  Sources  organisms  to  multi-­cellular  organism,  some  with   Shooting   prices   of   oil,   increase   in   consumption  fairly  complex  and  differentiated  form.  Algae  are   of   fossil   fuel,   advances   in   technology   and  usually   found   in   damp   places   and   bodies   of   g   have  water  and  thus  are  common  in  terrestrial  as  well   attracted   demand  for   algae   as   a   potentially   rich  as   aquatic   environment.   There   are   more   than   source   of   sustainable   biofuels.   Algae   are   very  30,000   fresh   water   and   salt   water   species   of   beneficial   as   a   renewable   fuel   resource   because  algae.   Approximately   1,000   algae   species   show   of  the  following  advantages:  the  potential  for  production  of  biofuels.   It   has   one   of   the   most   efficient   and   fastest  Microalgae   production   cycles,   which   converts   solar   energy   and   carbon   dioxide   into   renewable  Studies   shows   that   algae   species   which   are   and  sustainable  fuels.  primarily  unicellular  or   diatom  microalgae  has  a  potential   of   biofuels,   meeting   the   general   It   is   an   environment   friendly   source   of  requirement  for  algae  production.  These  species   producing   energy.   It   efficiently   sequesters  are  useful  in  producing:   atmospheric   carbon   dioxide,   favorably   balances   greenhouse   gas   production   and   Carbohydrate   (sugar)   compositions   most   reduces   the   long-­term   impact   of   global   suitable  for  ethanol  production,  or     warming.   Also,   it   provides   environmental   Lipid   (fats/oils)   compositions   which   are   solutions   for   recovery   of   toxic   stackgas   suitable  for  production  of  biodiesel,  or     pollutants  and  remediation  of  polluted  water   Hydrocarbon   compositions   suitable   for   streams.   production  of  renewable  distillates.   The   production   of   oil   per   land   mass   is  These   are   the   most   primitive   form   of   plants;;   greater  than  any  terrestrial  crop  and  can  be  however   the   mechanism   of   photosynthesis   is   cultivated  virtually  anywhere.  similar   to   that   of   higher   plants.   Due   to   simple   Also,   the   hydrocarbons   derived   from   algae  cellular   structure   and   growth   in   aqueous   production   can   be   used   to   produce  environment  with  more  efficient  access  to  water,   renewable   biofuels   for   direct   substitution   of  carbon  dioxide  and  nutrients,  microalgae  are  far   fossil  fuels.  more   efficient   converters   of   solar   energy.  Biologists   have   categorized   algae   into   a   variety   Global  Algae  Market  Opportunities  of  classes  on  the  basis  of  pigmentation,  life  cycle   The   global   market   for   Algae   is   poised   for  and  basic   cellular   structure.   The   most   abundant   explosive   growth   in   the   next   10   years   reaching  types/families  of  microalgae  include:   61MM   gallons   per   year   and   a   market   value   of   Green   Algae     They   generally   exhibit   high   AU$1.3B  by  2020,  representing  a  CAGR  of  72%,   growth   rates   and   are   considered   as   the   roughly   on   par   with   early   development   in   the   evolutionary   progenitors   of   modern   plants.   biodiesel   industry.   Algal   bio-­fuels   have   matured   Carbohydrates   and   natural   oils   (lipids)   are   significantly   in   the   last   few   years,   moving   from   the   main   storage   compounds   for   green   small   research   labs,   to   pilot   projects,   to   small   algae.   scale   demonstration   projects,   and   now   to   first-­ stage  pre-­commercial  trials  for  CO2  capture  in  a   Diatom   Algae     Found   in   oceans,   they   are   handful  of  projects.     rich   in   silica   in   the   cell   walls   and   store   carbon   primarily   in   the   form   of   natural   oils   Globally,  the  United  States  is  poised  to  ramp  up   or  carbohydrates.   production   the   earliest   amongst   world   markets,  Algae.Tec  Limited    Arrowhead  BID   14 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  15. 15. with   50%   of   all   algae   activity.   The   European   goes  into  fuel,  but  40%  of  the  profits  come  from  Union  (EU)  market,  accounting  for  about  30%  of   petrochemicals.   The   world   bio-­fuels   market   is  algae   activity,   will   be   limited   initially   by   the   expected   to   grow   at   a   CAGR   of   12%+   until   2017.   Despite   an   economic   downturn,  by   insufficient   access   to   water,   land,   and   environmental   concerns   and   volatile   crude   oil  nutrient   sources.   It   is   believed   that   United   prices   continue   to   drive   the   algae   bio-­fuel  States   and   Europe   cannot   grow   enough   corn,   industry.   The   expected   commercial   timeline   of  soy,  or  rapeseed  to  meet  there  bio-­fuel  targets.   Algal  Bio-­fuels  is  shown  in  the  chart:  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   Source:   Algae   2020,   Emerging   Markets   Online   Consulting   Services,   Biofuel  Digest  depleting  fresh  water  resources.      The   industry   believes   that   the   algae-­based  biofuels  market  will  be  characterized  by  regional   Technology  collaborations   and   partnerships   that   are   able   to  capitalize   on   efficiencies   through   expertise   The  company  uses  McConchie-­Stroud  technology  related   to   unique   environmental   conditions,   co-­ system   to   produce   algae-­based   biofuel.  location   opportunities,   and   access   to   end   Currently,   the   company   is   pursuing   the  markets.   This   horizontal   organization   will   result   commercialization   of   this   technology   for   algae  in   significant   consolidation   within   the   market   production  and  processing  system.    over  the  next  decade.   McConchie-­Stroud   System   has   achieved  Algae   are   attracting   increased   investments   and   exceptional  algae  productivity  and  yields  of  algal  interests   from   bio-­fuel,   petroleum   and   products   during   the   research   and   development  agribusiness   industries.   Driven   by   escalating   phase  due  to  the  following:  global   climate   change   concerns   and   the   rising   Innovative   Light   System:   Contains   a   novel  cost  of  petroleum-­based  energy,  companies  and   lighting  system   for   optimal   provision   of   light   for  government   entities   are   developing   the   use   of   growth  of  algae.  bio-­fuels   derived   from   algae   to   reduce   carbon   Modular   Reactor:   Enables   growth   of   algae   to   be  emissions   from   power   plants   and   generate   easily  controlled  and  optimized.  renewable  transportation  fuels.     Controlled   Environment:   Enables   a   nutrient   rich  Using   an   intricate   process   of   photosynthetic,   atmosphere  for  better  algae  growth.  companies  have  developed  biodiesel  and  ethanol   Algae   are   micro   organisms   that   contain  from   algae   that,   given   optimal   conditions,   can   chlorophyll,   and   with   water,   carbon   dioxide   and  double   its   volume   overnight.   Up   to   50%   of   an   sunlight,   they   produce   complex   carbon   chain  algas   body   weight   is   comprised   of   oil,   whereas   molecules   such   as   hydrocarbons   and  oil-­palm  trees  -­  currently  the  largest  producer  of   polysaccharides   and   proteins.   The   composition  oil   to   make   bio-­fuels   -­   yield   just   about   20%   of   of   algae   product   is   dependent   on   the   specific  their  weight  in  oil.     species   utilized   and   the   photo-­synthesis  Algae   command   dominating   position   in   operating   conditions   employed.   Algae   products  renewable   chemicals   as   algae   is   the   only   contain  45%-­80%  of  carbon  content  in  the  form  renewable  feedstock  which  can  scale  realistically   of   lipids/oils,   carbohydrates,   proteins   and  to   compete   with   petroleum.   90%   of   crude   oil   hydrocarbons.  Algae.Tec  Limited    Arrowhead  BID   15 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  

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