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 email@example.com firstname.lastname@example.org 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.
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.
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.
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.
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.
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.
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.
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.
Algae.Tec bioreactors receive approval for Australian facility: On October 18, 2011, the company announced that its demonstration plant, Shoalhaven One, received development approval under the Shoalhaven City Council Environment Planning and Assessment Act. The plant will be used to capture carbon dioxide waste from power stations and manufacturing facilities, feeding the pollution into the algae growth system. The permit is effective immediately, and after three years, Algae.Tec will have the option of expansion. Shoalhaven One will be sited next to the Manildra meetings in China and Germany: On July 18, 2011, the company announced that its management returned from customer and site meetings in China and sustainable fuels such as biodiesel and green jet fuel. Algae.Tec technology uptake due to Australian price on carbon: On July 14, 2011, the company indicated that the introduction of a price on carbon by the Australian Government in its Clean Energy Future (CEF) package would accelerate uptake of the Algae.Tec technology by carbon dioxide emitting industries. The Algae.Tec enclosed modular technology captures carbon dioxide pollution from power stations and manufacturing facilities, which feeds into the algae growth system. On July 08, 2011, the company announced that it producer, the Manildra Group, to construct a demonstration-scale algae production facility in Nowra, NSW and the project could be operational by the first quarter of 2012. The company announced that Manildra is making several contributions to the project, including access to land and utilities. regulations are met. The company intends to convert a percentage of the algae produced at the algae feedstock will be converted into jet fuel and used for testing purposes in aircraft engines. Listing Information Algae.Tec was listed on the Australian Stock Exchange on 13-Jan-2011 and was listed on Frankfurt Stock Exchange on 21-Feb-on the USA OTC market on 28-Apr-2011. Contacts Registered office Ground floor, 516 Hay, Subiaco, WA 6008 Postal address PO box 2146, Subiaco, WA 6904 Telephone +61 (08) 9380 6790 Facsimilie +61 (08) 9381 9161 E-mail email@example.com 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.
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.
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.
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.
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.
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.
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.
Algae Production process and its downstream bio-fuels, including detailed material and energy balances, process Algae production comprises a series of critical flow diagrams, unit and equipment design and processing steps, including supply systems for specifications, plant lay-out and turnkey capital carbon dioxide, light energy and nutrients, estimates. Based on the development phase harvesting of biomass and refinement of algae results, engineering design and process products. simulation modeling, material and energy The company developed and utilized process balance data are presented in the process flow simulation models for evaluation of the algae diagram for a typical algae plant. Make-up Seed Algae Water Supply Algae Unit CO2 Nutrients & Water Recycle Water Nutrients Nutrient System Off-Gas Chemicals Alkalinity System Vents Algae Oil Modular Photo- Chemicals Light Energy Product Refinement Fatty Acids Reactors Algae-Water Dilute Algae-Water Biomass Stackgas Gas Treatment Harvesting & Additives Separation Biomass Losses Recycle Water Conversion Energy Process Areas The entire process of algae production and processing is described in following table: Process Steps Process Description Key Unit Operations Utilization of high CO2 content (8-15% volume) Stackgas Pre-Treatment stackgas from fossil fuel power plants, biomass etc. Water Recycle Gas Treatment Preparation of stackgas for photo-reactors, including Gas Distribution Network water removal, temperature control, compression and gas distribution. Recovery of Module Off-Gas Solar Collection Light Energy Solar energy in the form of visible light absorbs and Visible Light Filtration & Distribution Supply converts CO2 to produce algae. Energy Recovery/Storage Preparation units for water supply, nutrient package, Water Supply (fresh, marine and/or alkalinity control and make-up algae. wastewater) Raw Material Alkalinity Control Systems Nutrients, Nitrogen and Phosphorus are formulated via Nutrient Preparation Unit addition of industrial fertilizers. Make-up Algae Control System Modular Photo- Photosynthesis bio-reactor system controls the overall Modular Photo-Reactors Algae.Tec Limited Arrowhead BID 16 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Process Steps Process Description Key Unit Operations Reactors productivity and desired product yields per species. Internal Light Distribution Network Modular Infrastructure & Process Controls per Module Series Low concentration of micro-algae in final output Combinations of Flocculation, Gas-Lift requires various algae separation measures. Frothing & Paste Handling Harvesting Recovery methods for algal cell fracturing and direct Mechanical Separation Units recovery of hydrocarbon products provide improved overall energy efficiencies. Algae Biomass Refinement Algae biomass contains predominantly lipids (fats/oils) and carbohydrates Oil Extraction Units Conventional oil extraction technologies (mechanical Crude Algae Oil Treatment Product expeller and/or solvent extraction) are employed to Refinement Fatty Acid Co-Product Recovery recover crude algae oil. Chemical treatment and refinement is required for Biomass Product Refinement purification of the finished algae oil product. Biodiesel & Glycerine via Oil Transesterification Algae oil acts as raw material for biodiesel (and Downstream glycerine). Biomass Animal Food Products Products Biomass is a source of animal feed, ethanol and other Ethanol Production energy sources. Middle Distillates Production Power Generation via Biomass Gasification Algae.Tec Limited Arrowhead BID 17 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Project Risk Profile Analysis standing utilized. Algae.Tec will be required to raise additional funds in future and faces the Peer Risk Analysis risk of obtaining it on terms which are favorable We have evaluated the risk profile of Algae.Tec to the company. Additionally, the funds may not compared with other biofuel players in Australia. be sufficient to enable the company to fully commercialize the McConchie Stroud System. comparative ba 1.9 The funds raised through equity have been used based on the risk profile of the major projects for the establishment of a first class research pursued by the company as well as its peers. and development and commercial facility. On The important risk categories considered for the 24th Nov, 2011, Algae.Tec Limited announced study include: that first photo-bioreactor module has been Project Stage Risk: Medium - Near feasibility shipped from the Algae Development and Manufacturing Centre in Atlanta, Georgia in the Intellectual Property Risk: Medium Yet to United States. Company aims for biofuel be patented production at Shoalhaven One in early 2012. Financing Risk: Medium Secured $6MM financing On 1st December 2011, Algae.Tec Limited Operational Risk: Medium dependent on announced that it signed a collaboration contract technology used with Holcim Lanka Ltd. to develop its algae The Risk Profile has been assessed as a biofuel production facility in Sri Lanka. Holcim is weighted blended score based on the project investing in the plant to reduce its carbon stage risk (30% weight), intellectual property footprint by channeling waste carbon dioxide risk (30%), financing risk (20%), and into the algae growth system. Initially biofuel operational risk (20%). production facility will start off with five photo- bioreactor modules but this could be expanded Peer Risk Profile to a much larger facility should Holcim decide Total Project Intellectual the facility is beneficial. Financing Operational Ticker Risk Stage Property Risk Risk On 8th December 2011, Algae.Tec Limited Score Risk Risk announced that San Francisco-based La Jolla AEB 1.9 2.0 2.0 1.5 2.0 Cove Investments has provided the company PALG 1.4 1.0 1.0 2.0 2.0 with $6m in convertible notes to be drawn down SZYM 1.2 1.0 1.0 1.0 2.0 over three years. The additional funding will enable the Company to fast-track a number of Intellectual Property Risk - MEDIUM projects in Asia such as the Holcim Lanka biofuels and carbon capture facility and projects The company has not obtained a patent in in Europe. In Jan 2012, the company relation to the McConchie-Stroud System so far. comfortably raised AU$5m through Patersons There is no surety that the current patent Securities by issuing of 12.5m shares at an issue application in Australia for the McConchie-Stroud price of 40 cents per share to sophisticated and will be granted, or that any other patent professional investors. applications that may be lodged in relation to the McConchie Stroud system will be granted. Any additional equity financing will dilute shareholders interest, and debt financing, if There is always a risk of a third party bringing a available, may involve restrictions on financing claim in relation to any aspect of the property. and operating activities. If the company is not Any dispute will adversely affect the company. able to obtain additional financing, it may be However, the company has taken reasonable required to reduce its scope of operations and steps to protect the ownership of the intellectual scale back its expansion and development property related to the McConchie-Stroud and programs. believes that there is no third-party interest. Success of the McConchie-Stroud System Financing Risk MEDIUM - HIGH The company is in its initial stages of development. It is building a demonstration The company is relying on the success of its facility and there is no guarantee that currently McConchie-Stroud system and believes that it available funds will be sufficient for fulfilling the will be able to develop and commercialize the initial business objective, with a major portion system in the near future. Algae.Tec recently Algae.Tec Limited Arrowhead BID 18 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
signed a collaborative contract with Holcim Parabel plans to generate licensing fees and Lanka Limited to develop its algae biofuel royalties from customer licensees in the global production plant in Sri Lanka. The Company has energy and agriculture markets. They would also entered into a Joint Venture with Shandong consider entering into alternative arrangements Kerui Group for a 250-module algae biofuels in which license fees and royalties would be facility in China. This signifies that McConchie- reduced in place of a greater share of the Stroud system is commercially viable. to capital requirements. The company has two Key Personnel - MEDIUM hector demonstration facilities in Florida, while it The company faces the risk of losing its two key has done testing of its fuel produce along with directors, Messrs McConchie and Stroud, who Siemens and the University of Utah. developed the McConchie-Stroud system. While these directors are the major shareholders in Solazyme Inc. the company, non-involvement of either of them The San Francisco-based, Solazyme Inc., grows will adversely hamper the compa algae with sugars in closed fermentation tanks plans. to create oils, which can be used for liquid fuel and for chemicals, foods, or personal care Operational Risks - MEDIUM products. Solazyme proprietary microalgae are heterotrophic, meaning they grow in the dark (in plants proposed by the company may be fermenters) by consuming sugars derived from affected by various factors, including failure to plants that have already harnessed suns locate a suitable location, failure to achieve energy. By using standard industrial predicted yields of algae and algae products, fermentation equipment, they are able to operational and technical difficulties encountered efficiently scale up and accelerate microalgaes in scaling up the McConchie Stroud system to natural oil production time to just a few days commercial production level. The company also and to commercial levels. faces the risk of unanticipated bioreactor The companys strategy has been to make oils problems which may affect the production cost. for specific personal care and nutritional markets Apart from the above risks, the company faces before taking on liquid fuels where there is the risk of adverse weather conditions, industrial margin pressure and brands play a major role. It and environmental accidents, currency risk and has customers for food and personal care and industrial disputes. was awarded a Department of Energy grant to make fuel for use by the Navy, which Peer Profile successfully tested a 50-50 blend of petroleum Parabel Inc. and algae oil. Solazyme has development arrangements with airlines Qantas, Chevron Parabel Inc. is a Melbourne-based algae Technology Ventures, and with chemical production firm that has lemna as its main company Dow. output. It is easier, at present, to grow, harvest and dewater lemna than the unicellular algae Solazyme signed an agreement with Bunge for harvested by Algae.Tec. Lemna shares with commercial renewable oil plant in Brazil. This JV microalgae, a rapid growing rate and ability to planning to build 100KT renewable oil production generate large amounts of usable biomass on facility located at Bunge owned sugar cane mill non-productive land. in Brazil. Dynamic Fuels LLC has subcontracted the contract to supply the U.S. Navy with 450K The company is planning to optimize the growth gallons of renewable fuels to Solazyme Inc. As of indigenous micro-crops with open tanks at per the Navy and the USDA report this is the commercial scale through the management of single largest purchase of biofuel in government light exposure and other elements of the history. The fuel will be used as part of the environment. The technology monitors variable parameters, including light, temperature, composed of vessels and ships powered by density and nutrition, to determine the optimal biofuel.point in the growth cycle at which the biomass should be harvested. Algae.Tec Limited Arrowhead BID 19 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Risk Parameters Definition biofuel companies. Debt is considered only as a last option to the public issue due to high Project Stage Risk financing charges as well as financial covenants Arrowhead understands the different project attached. stages for this business model to be: We consider a project to be of lower risk profile if Laboratory Research: Deals with research and demonstration plant is successfully completed and development (R&D) of the project. yields desired results as the viability of the project will be proved. Pilot Tests: Initial tests of the R&D results are carried out for the technical, commercial, and Intellectual Property Risk economic feasibility of the project. The technology used for the culture, and Demostration Plant: The Plant will be of a harvesting of algae and the production are highly relatively higher capacity than of the pilot tests and intends to prove the commercial technical capabilities and are mostly developed in- feasility of the project. house. In-house developments generally involve Commercial Plant: Based on market prospects huge R&D expenditure which they aim to recover the commercial plant with required capacity from future revenues. will be developed for the production. We consider a project to be of lower risk profile if We consider a project to be of a lower risk profile the technology possesses all necessary patents. if demonstration plant is successfully completed and yields desired results and a commercial plant Operational risk is underway as the uncertainty regarding the Depending on technology, the input used for the commercialization of the project reduces culture of algae would be light or sugar/starch. significantly. The technology using light as its input for culture Project Financing Risk will need to set up the necessary infrastructure whereas when the input is sugar/starch, there is The projects in this industry are very capital an additional uncertainty with respect to the cost intensive. Therefore, this business model, in and availability of the input. general suffers from financing risk as the viability of the project is known only at a later stage, when Since the culture of algae is technology driven, half of the capital outlay is complete. we see the risk emerging from system break- down requiring technical expertise. The industry has most of the initial projects financed by private equity firms or venture We consider a project to be of lower risk profile if capitalists. Other important source could be its input is available at lesser cost than its peers equity financing as resorted to by most startup input and is available in abundance. Algae.Tec Limited Arrowhead BID 20 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Market Enterprise Project Financing Algae.Tec in comparison Company Ticker Major Projects cap value Stage information with peer (AU$MM) (AU$MM) Algae.Tec is in its initial stages when compared to its peers. It is currently building a demo plant IPO closed in whereas Parabel has an December operational demo plant and 2010 for Solazyme has a fully AU$5m commercial plant in place. Accepted for listing on made along with Manildra, Frankfurt the largest Ethanol producer Stock in Australia. Demo Plant with Exchange in Manildra Algae.Tec signed a Building a Feb 2011 Algae.Tec AEB Biofuels 98.04 97.3 collaboration contract with demo plant In Apr 2011 Production Holcim Lanka Ltd. to build company its first algae biofuels Facility in Asia announced production facility in Asia. its ADR Recently set up 70K sq. ft. Placement of Algae Development & shares worth Manufacturing Centre in AU$5m Atlanta. through Patersons Secured funding support Securities from San Francisco based La Jolla Cove Investments with $6MM in convertible notes to be drawn down over a three-year period. Algae.Tec is in its Ministry of developing stages while Natural Parabel has a functional Currently Resources for the Active Demo managed by demo plant in place. Parabel Inc. PALG Republic of 676.85 696.0 Algae.Tec is currently Plant in US Private Suriname building a demo plant for equity firms commercialization of algae Biomass fuel test production, which will be functional in early 2012. Chevron Technology Ventures IPO in May Marine Diesel fuel 2011 for $18 Algae.Tec is in its infant for US NAVY Commercial per share. stage when compared to Solazyme SZYM Plant 700.57 459.4 Solazyme, which has a Renewable Joint 50:50 between the functional commercial plant chemicals project supplying fuel to US Navy. Nutrition partners products Skincare Products Algae.Tec Limited Arrowhead BID 21 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Value The Fair Market Value for Algae.Tec shares stands between AU$305.3MM to AU$714.8MM. The Fair Market Value for one of Algae.Tec publicly traded shares stands between AU$1.15 to AU$2.70. Algae.Tec Balance Sheet Forecast CONSOLIDATED all figures in 000 AU$, Low bracket estimates BALANCE SHEET unless stated differently year ending June 30 2012E 2013E 2014E 2015E 2016E 2017E 2018E Total Current Assets 4,753 14,363 23,781 24,891 83,512 105,422 128,041 Total Non-Current Assets 22,615 38,353 36,244 34,250 32,367 30,587 28,904 TOTAL ASSETS 27,368 52,716 60,025 59,141 115,878 136,008 156,945 Total Current Liabilities - 2,399 3,670 3,743 3,818 3,895 3,972 Total Non-current Liabilities 29,815 39,815 19,815 0 0 0 0 TOTAL LIABILITIES 29,815 42,214 23,485 3,743 3,818 3,895 3,972 (2,447) 10,502 36,540 55,398 112,060 132,114 152,972 TOTAL LIABILITIES and EQUITY 27,368 52,716 60,025 59,141 115,878 136,008 156,945 Important information on Arrowhead methodology The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent, depending on the sub-sectors in which the research is conducted. But all Arrowhead valuation researches possess an underlying set of common principles and a generally common quantitative process. With Arrowhead commercial and technical due diligence, the company researches the fundamentals, assets and liabilities of a company, and builds estimates for revenue and expenditure over a coherently determined forecast period. Elements of past performance such as price/earnings ratios, indicated as applicable, are mainly for reference. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence. We have also presented the comparables method based on market capitalization per resource of gallon (AU$/gallon) as a secondary measure of fair value, which, though is not central to the methodology applied towards building the fair value bracket, is presented here as additional information. Arrowhead BID Fair Market Value Bracket The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analyses such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a valuation tool. In principle, an investor comfortable with the high brackets of our key variable analysis will align with the high bracket in the Arrowhead Fair Value Bracket, and, likewise, in terms of low estimates. The investor will also note the company intangibles to analyze the strengths and weaknesses, and other essential company information. These intangibles serve as supplementary decision factors for adding or The bracket should be taken as a tool by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand that while on the one hand global capital markets contain inefficiencies, especially in terms of information, on the other, corporations and their commercial and technical positions evolve rapidly. This present edition of the Arrowhead valuation is for a short to medium-term alignment Algae.Tec Limited Arrowhead BID 22 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
analysis (one to twelve months). The reader should refer to important disclosures on page 25 of this report. Information on the Algae.Tec valuation Algae.Tec Valuation Methodology: The Arrowhead fair valuation for Algae.Tec is based on the discounted cash flow (DCF) method. Valuation is based on for the three products namely Algae Oil, Biomass and other nutrients. Time Horizon: The Arrowhead fair valuation for Algae.Tec is based on a DCF method. The time period chosen for the valuation is ~123 months (2012-2022). While revenue is expected to ramp up significantly during the 2013-16, the later years are heavily discounted and have a marginal effect on valuation, which are included primarily to present a full project cycle situation. Underlying Business Plan: Algae.Tec limited is establishing strategic partnerships and alliances with investors, venture partners, customers and suppliers (materials, services, technologies) to accelerate The Manildra Group for the first Australian plant Leighton Contractors for engineering and project management expertise Joint Venture with Shandong Kerui Group to a 250-module algae biofuels facility in China. After the completion of 250 module plant, the JV will look to secure funding to develop new projects exceeding 1,000 modules. They also target to engage with CO2 emitters in the Greater China region. Also, the company has inked a deal with Holcim Lanka Limited for developing its algae biofuel production facility in Sri Lanka for evaluation purpose, which can be expanded to much larger scale. The initial two commercial facilities will be deployed in China and Australia. Considering the rising demand for biomass in India, the company is equally inclined towards venturing in India. The company plans to invest IPO proceedings in building demonstration facility. It has inaugurated Algae Development & Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled. On 24th Nov 2011, the company reported that the first photo-bioreactor module has been shipped from the Algae Development and Manufacturing Centre in Atlanta, Georgia in the United States and is headed for Australian shores. Algae.Tec has applied for patents in relation to McConchie-Stroud System, which would cement its technological core competency. Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 0%, representing the maturity, technology change and prospective competiveness in the business. Prudential Nature of Valuation: This Arrowhead Fair Value Bracket estimate is a relatively prudential estimate, as it discounts the eventuality of the company acquiring and producing from any projects other than Manildra - Algae.Tec Demo Plant before 2025. Algae.Tec Limited Arrowhead BID 23 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Key variables in Algae.Tec revenue estimations Variable 1 Modules Constructed believe the company will install the first module and will go operational from 2013. Overall, we have remained conservative in estimating the number of modules considering some level of uncertainty in future revenue generation. Additionally, financing and technology risk could adversely impact the -related strategy. 2013 2014-2020 2021-2025 Low 250 375 625 High 300 625 750 Variable 2 Algae Production per Module Arrowhead believes that the low and high estimates of cultivation of algae from one module are 225T and 250 Variable 3 Algae Oil, Biomass and Other Nutrients Prices Arrowhead has forecasted the following low end and high end price range for the three products:- Project Low end (AU$/mt) High end (AU$/mt) Algae Oil 950 1,080 Biomass 375 425 Fatty Acid (Other nutrients) 600 650 Algae oil is a substitution of soya and palm oil which are used as raw material for biodiesel production. Currently, soya oil and palm oil are trading in a range of AU$1000/T to AU$1200/T. We have assumed that algae oil would sell at a discount of around 10for bio diesel production. Biomass can be substituted by high protein soybeans and corn which currently trade at AU$280/T and AU$500/T, respectively. We have used the average of these two prices to arrive at the selling price of the biomass produce. Currently fatty acid trades at around AU$650/T. We believe algae fatty acid output would fetch a similar price. Algae.Tec Limited Arrowhead BID 24 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Analyst Certifications and Important Disclosures objectives and financial situation utilizing their Analyst Certifications own financial advisors as they deem necessary. I, Vishal Pasari, certify that all of the views Investors are advised to gather and consult expressed in this research report accurately multiple information sources before making reflect my personal views about the subject investment decisions. Recipients of this report security and the subject company. are strongly advised to read the information on Arrowhead Methodology section of this report to I, Rashmi Shah, certify that all of the views understand if and how the Arrowhead Due expressed in this research report accurately Diligence and Arrowhead Fair Value Bracket reflect my personal views about the subject integrate alongside the rest of their stream of security and the subject company. information and within their decision taking process. Important Disclosures Past performance of securities described directly Arrowhead Business and Investment Decisions, or indirectly in this report should not be taken as LLC received fees in 2011 and 2012 from an indication or guarantee of future results. The Algae.Tec Limited for researching and drafting price, value of, and income from any of the this report and for a series of other services to financial securities described in this report may Algae.Tec Limited, including distribution of this rise as well as fall, and may be affected by report and networking services. Certain simple and complex changes in economic, Arrowhead BID partners and employees own financial and political factors. long positions in Algae.Tec Limited equity. Should a security described in this report be Aside from certain reports published on a denominated in a currency other than the periodic basis, the large majority of reports are a change in exchange published by Arrowhead BID at irregular rates may adversely affect the price of, value of, or income derived from the security. judgment. This report is published solely for information Any opinions expressed in this report are purposes, and is not to be considered as an offer statements of our judgment to this date and are to buy any security, in any state. subject to change without notice. Other than disclosures relating to Arrowhead This report was prepared for general circulation Business and Investment Decisions, LLC, the and does not provide investment information herein is based on sources we recommendations specific to individual believe to be reliable but is not guaranteed by investors. As such, any of the financial or other us and does not purport to be a complete money-management instruments linked to the statement or summary of the available data. company and company valuation described in Arrowhead Business and Investment Decisions, LLC is not responsible for any loss, financial or other, directly or indirectly linked to any price Investors must make their own investment movement or absence of price movement of the decisions based upon their specific investment securities described in this report. Algae.Tec Limited Arrowhead BID 25 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Valuation WACC Risk-free rate 3.96% xiv Production/ Module Algae Biomass Other Beta 0.75 xv Risk premium 4.5% xvi Max 1.0% xvii value Additional Risk Premium Refer to Key Variables section. Cost of Equity 8.1% xviii Min Terminal Growth Rate 0% xix value FCFE (High) Time Period --> 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net cash from operating activities (4,130) 16,914 42,470 58,357 59,253 60,249 61,490 62,331 63,193 Capital Expenditure (27,500) (22,000) (2,109) (1,993) (1,883) (1,780) (1,682) (1,589) (1,502) Net Debt Addition 29,815 10,000 (20,000) (19,815) - - - - - Free Cash Flow to Equity (1,815) 4,914 20,361 36,549 57,369 58,469 59,808 60,741 61,691 Discount Factor 0.98 0.91 0.84 0.78 0.72 0.66 0.62 0.57 0.53 Present Value of FCF (1,780) 4,459 17,094 28,388 41,227 38,874 36,790 34,569 32,483 FCFE (Low) Time Period --> 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net cash from operating activities (4,130) 9,195 17,547 22,663 23,070 23,452 24,070 24,277 24,495 Capital Expenditure (25,000) (20,000) (1,918) (1,812) (1,713) (1,618) (1,529) (1,445) (1,366) Net Debt Addition 29,815 10,000 (20,000) (19,815) - - - - - Free Cash Flow to Equity 685 (805) (4,371) 1,036 21,358 21,834 22,541 22,832 23,129 Discount Factor 0.98 0.91 0.84 0.78 0.72 0.66 0.62 0.57 0.53 Present Value of FCF 672 (730) (3,669) 805 15,348 14,517 13,866 12,994 12,179 ARROWHEAD FAIR VALUE BRACKET AU$/share Contribution by Key Variable Terminal Value (TV) 921,233 460,726 3.00Present Value of TV 415,216 207,657 2.50Present Value of FCF + TV 713,962 304,503 2.00+ Cashxx 820 820 Equity Value Bracket 714,782 305,323 1.50Shares Outstanding (in 000)xxi 264,976 264,976 1.00Fair Value Bracket AUD 2.70 AUD 1.15 0.50Current Market Price AUD 0.37 AUD 0.37 -‐Current Market Capitals 98.0 98.0 Low Algae Oil Biomass Other High NutrientsTarget Market Capital 714.8 305.3 Algae.Tec Limited Arrowhead BID 26 OTCBB: ALGXY;; ASX: AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.
Notes and References i Arrowhead Business and Investment Decisions Fair Value Bracket - AFVBTM. See information on valuation on pages 24-28 of this report and important disclosures on page 25 of this reportii Source: Bloomberg - 07 Mar 2012iii Source: Bloomberg - 07 Mar 2012iv Source: Bloomberg 3 month volume 07 Mar 2012v Source: Bloomberg 07 Mar 2012 vi Source: http://oakhavenpc.org/cultivatingvii Source: http://oilprice.com/Alternative-Energy/Biofuels/The-Growing-Market-for-Biodiesel-and-Bio-Oils.html viii Source: http://www.tcbmag.com/peoplecompanies/companies/127267p1.aspx ix Source: http://www.greentechmedia.com/articles/read/commercial-jet-fuel-sooner-than-we-think/ x Source: http://www.indexmundi.com/commodities/?commodity=soybean-oil&months=120xi Source: http://www.indexmundi.com/commodities/?commodity=palm-oil&months=60xii http://www.nyse.tv/crude-oil-price-history.htm xiii Source:http://www.emerging-markets.com/algae/Algae2020StudyandCommercializationOutlook.pdf;; http://www.energybusinessreports.com/shop/item.asp?itemid=1450 xiv Source: Bloomberg - 07 Mar 2012xv Arrowhead Estimatesxvi Arrowhead Estimatesxvii Arrowhead Estimatesxviii Arrowhead Estimatesxix Arrowhead Estimatesxx As on Dec 31, 2011xxi Source: Bloomberg - 07 Mar 2012Algae.Tec Limited Arrowhead BID 27 OTCBB: ALGXY;; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 25 of this report.