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Algae.Tec   abid report - 15 nov 2011
 

Algae.Tec abid report - 15 nov 2011

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    Algae.Tec   abid report - 15 nov 2011 Algae.Tec abid report - 15 nov 2011 Document Transcript

    • Due Diligence and Valuation ReportArrowhead Code: 10-01-04Coverage initiated: 23 March 2011This document: 15 November 2011 Company: Algae.Tec LimitedFair share value bracket: AU$1.56 to AU$ 2.21i Ticker: ASX:AEB, OTCBB:ALGXYShare price on date: AU$0.35ii Headquarters: Perth, AustraliaAnalyst TeamThomas Renaud Rashmi Shah Executive Chairman: Mr. Roger Sydney Stroudthomas.renaud@arrowheadbid.comrashmi.shah@arrowheadbid.com Website: www.algaetec.com.au+1 (212) 619 6889 Algae.Tec tapped into international capitalMarket Data markets with a public offer and listed on the52-Week Range: AU$0.17 to AU$0.67iii Australian Stock Exchange and Frankfurt StockAverage Daily Volume: 15,180iv Exchange. On 28thApril 2011, the company‘sMarket Cap. on date: AU$87.12MM American Depositary Receipts (ADR) commenced trading on the USA OTC market under the tickerFinancial Forecast Data (in AU$) ALGXY. ‗12E ‗13E ‗14E ‗15E 16E ‗17E ‗18E Algae.Tec has developed the McConchie-StroudHigh profit/(loss) MM (6.9) 27.2 58.6 59.2 60.3 61.6 63.0 System which cultivates and economicallyHigh EPS harvests high yield algae. The system is scalable, (2.76) 10.94 23.54 23.77 24.23 24.76 25.29AU$ has minimal land footprint and water usage. TheLow profit/ (6.9) 17.9 39.0 39.4 40.2 41.1 42.1 technology provides competitive advantages in(loss) MM terms of low capital and operating costs, minimalLow EPS (2.76) 7.18 15.66 15.83 16.15 16.53 16.90 requirement of land, low water evaporation andAU$ better recycling of water amongst other specificsFiscal Year (FY) which make it commercially viable.1stJuly – 30thJune The global market for algae is poised for explosive growth in the next 10 years, demand isSummary expected to reach 61MM gallons/year of bio-fuelAlgae.Tec Limited is involved in the production of and a market value of AU$1.3B by 2020algae to manufacture sustainable fuels such as representing a CAGR of 72%, roughly on par withbiodiesel and green jet fuel. Management has early development in the biodiesel industry.core competencies in biofuel technologies, energy Globally, the United States (US) is poised to rampmarkets, project commercialization and business up production the earliest among world marketsmanagement. The company has successfully with 50% of all algae activity. The Europeandemonstrated the algae oil and biomass yield in Union, accounting for about 30% of algae activity,the experimental stages. The company is now will be limited initially by the industry‘s focus onbuilding a demonstration facility with Manildra to university research, and later by insufficientprove its commercial viability, which is expected access to water, land, and nutrient sources. It isto be completed in Q1-2012. believed that the US and Europe cannot grow enough corn, soy, or rapeseed to meet their bio-The company intends to initiate the development fuel targets. Latin America and Asia Pacific, whichand operation of commercial facilities in several have fewer projects in operation today, are set tocountries, predominantly by way of joint venture. gain significant market share in the long run.The focus will be on Australia, U.S., China, Braziland Southern Europe. The products will be Arrowhead believes that Algae.Tec has enormousprimarily Biodiesel and Grade-A Jet Fuel. In growth potential with a medium risk profile.addition, the company has recently set up the Based on intrinsic revenue capacity from 50018,200 square feet Algae Development & modules, Arrowhead believes that the company‘sManufacturing Centre in Atlanta where the photo- fair share value lies in the AU$1.56 tobioreactors will be assembled for shipping. AU$2.21bracket.Algae.Tec Limited – Arrowhead BID 1 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Table of ContentsAlgae.Tec Presentation .....................................................................................................3News .................................................................................................................................8Listing Information ...........................................................................................................9Contacts ............................................................................................................................9Major Shareholders ...........................................................................................................9Management and Governance .........................................................................................10Assets and Projects .........................................................................................................11Technologies and Markets ...............................................................................................14Porter’s Five Force Analysis for the Biofuel industry in Australia ....................................18Project Risk Profile Analysis ............................................................................................19Peer Profile .....................................................................................................................20SWOT Analysis ................................................................................................................23Value ...............................................................................................................................24Analyst certifications ......................................................................................................27Valuation .........................................................................................................................28Algae.Tec Limited – Arrowhead BID 2 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Algae.Tec PresentationAlgae.Tec is an Australian biofuel company focused on commercializing technology that produces algaeto manufacture sustainable fuels such as bio diesel and green jet fuel. Founded in 2008, Algae.Tec hasconducted scores of laboratory, bench-scale and pilot tests and product trials, assessed competitivealgae technologies, and applied the results to detailed engineering evaluations of commercial plantoperations. These activities have led to the development of unique proprietary technology and know-how for high efficiency production of microalgae via a novel modular photo-reactor system and improvedalgae harvesting and product refinement technologies. The current strategy of continuous improvementand adherence to quality control in existing markets, are expected to assist in the achievement of theconsolidated group‘s long term goal and development of new business opportunities.In August 2010, the Group announced the signing of a strategic relationship agreement with PacificMinerals; a Hong Kong based Group, regarding the commercialization of its technology in China. Theparties agreed to set up a joint venture company in China with the aim of identifying and progressingwith commercial applications of its technology.In March 2011 Algae.Tec Limited announced the opening of its 18,000 sq ft facility in Atlanta Georgia.This facility is currently being used to build the first full size modules that will be established on theManildra site in Nowra, NSW.The company‘s unique technology has demonstrated sustained performance, providing step-changeimprovements in productivity, product yield, carbon dioxide sequestration, plant footprint requirementsand substantial capital/cost savings versus agricultural crops and other competitive algae processes inthe industry. The company is building a demonstration facility with Manildra to prove its commercialviability, the first modules of which are being built in the in Atlanta facility, are on track to be shipped tothe Nowra site in October 2011 and are expected to be operational in Q1-2012.Algae.Tec’s Asset PortfolioAlgae.Tec plans to construct modules that would cultivate Algae in efficient manner.The most important application of algae technology is likely to be in the generation of biodiesel, which isregistered and used as a direct diesel fuel substitute and fuel additive. Algae.Tec‘s primary focus hasbeen directed toward microalgae as the most efficient photosynthesis species for bio-fuels production.The optimum selection of the algal species for bio-fuels production depends on the ability to sustain theculture (resilience and reliability); species growth rate; the biomass specific contents of lipids,carbohydrates and proteins (combined productivity); and the overall supporting photosynthesisenvironment. Biodiesel provides important environmental advantages and has the highest ―energybalance‖ of any transportation fuel. The total global in-place production capacity of biodiesel is 37B litersper year, with price driven by and dependent on crude oil, government subsidy and price of biodieselfeedstock.Algae.Tec Limited – Arrowhead BID 3 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • It is estimated that algae produces more oil than any other oilseeds currently in use. For instance, wheresoybeans and sunflower yield 48 and 102 gallons of oil per acre year, microalgae‘s could range from5,000 to 15,000 gallons. The 125Mtpa vegetable oil market is set to witness a growth rate of 3%-5%.After oil extraction, algae biomass could be used as feedstock, agricultural fertilizer, biomass powergeneration, etc. The animal feed market alone is an AU$80B per year market; the primary source highprotein soybean meal is currently priced at approximately AU$450/T. The residual algae biomass withhigh carbohydrate and protein contents offers a direct substitute for agriculture-based protein sources.Other key useful forms of algae are fatty acids, glycerine and ethanol – ingredients for thepharmaceutical and consumer industries.For more detail on Assets, see the Assets and Projects section of this report.Algae.Tec’s Portfolio and Company PremiumsAdvantages of Algae: Algae are a group of aquatic estuarine and marine plant organisms, which mayrange from microscopic (microalgae) to many meters in length. Largely found in damp places and bodiesof water, approximately 1,000 algae species show the potential for production of biofuels. Theseorganisms contain chlorophyll and with water, carbon dioxide and sunlight, produce complex carbonchain molecules such as hydrocarbons and polysaccharides and proteins.Subject to each product‘s composition, Algae‘s carbon content could range anywhere between 45%-80%, in the form of lipids/oils, carbohydrates, proteins and hydrocarbons.The advantages of algae, as a source of renewable fuel are noteworthy:– Efficient and fast production cycle; converts solar energy and carbon dioxide into renewable and sustainable fuels.– Effectively sequesters atmospheric carbon dioxide, balances greenhouse gas production and reduces impact of global warming.– Provides environmental solutions for recovery of toxic stack gas pollutants and remediation of polluted water streams.– Hydrocarbons derived from algae production can be used to produce renewable biofuels for direct substitution of fossil fuels.– Algae-derived biofuels provide a significant reduction in vehicular exhaust emissions versus standard fossil fuels.– Algae.Tec requires relatively lesser land to produce the same amount of oil than the land required for oil production from palm, jatropha, canola, soy, cotton, corn etc.– Algae.Tec provides a long-term sustainable fuel source not derived from food source vegetable oils.– Algae.Tec due to nature of its operation is not subject to significant environment regulations under both the Commonwealth and state legislation.TechnologyPhotosynthesis is a biochemical process, during which algae absorbs light energy from sunlight andcarbon dioxide; utilizes water and critical nutrients and undergoes multiple step light and dark phasereactions to biologically produce primarily lipids, carbohydrates and proteins subsequently generatingoxygen.The Algae.Tec system combines closed control of algae production within an engineered modularenvironment and efficient downstream bio-fuel processing. The Algae.Tec production process isdescribed below.Algae.Tec Limited – Arrowhead BID 4 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • McConchie-Stroud SystemAlgae.Tec produces high-yield algae growth and harvesting technology through the McConchie-StroudSystem. The McConchie-Stroud System is designed to facilitate algae cultivation anywhere, includingmarginal land or industrialized areas. The system also incorporates scalability, minimal land footprintand water usage. McConchie-Stroud System consists of a modular reactor in which minute plants, calledmicroalgae 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 processand 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. Theproduction comprises a series of critical processing steps, including gas treatment, supply systems forcarbon dioxide, light energy and nutrients; harvesting of biomass and refinement of algae products.The advantages of the McConchie-Stroud module include:– Reduction of capital and operating costs, due to the possibility of sharing infrastructure as modules in close proximity can be grouped, relocated and re-used.– Minimal requirement of land, vis-à-vis peers, thereby reducing land leasing and purchase costs.– Reduced water evaporation and better recycling of water, nutrients and heat, and reduced risk of contamination of algae from external sources.Algae.Tec’s Portfolio and Company RisksIntellectual Property: Algae.Tec, so far, has not obtained a patent in relation to the McConchie-StroudSystem, 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 commercialfacilities 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 strategicpartner for success in these countries.Financing Requirement:Inability to obtain additional financing may reduce company‘s scope ofoperation and require scaling back expansion and development programs. Thecompany is building ademonstration facility and it is possible that available funds may not be sufficient to fulfill the businessAlgae.Tec Limited – Arrowhead BID 5 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • objective. Also the company might not have sufficient funds to enable the company to fullycommercialize the McConchie – Stroud System.Success of McConchie-Stroud system: The Company‘s success largely depends on the success of itstechnology. Though the company has shown excellent results during its research and developmentphase, it still faces the risk of commercialization of algae products from the McConchie-Stroud system.Apart from the above risks, the company faces the risk of attrition of its key personnel, operational risks,adverse weather conditions, industrial and environmental accidents, and industrial disputes.For a detailed risk assessment, please refer to the Risk profile analysis section.Algae.Tec’s Corporate StrategyThe company intends to initiate the development and operation of commercial facilities in severalcountries, predominantly by way of joint venture. The primary focus will be on Australia, U.S., China,Brazil and Southern Europe. The products will primarily be Biodiesel and Grade-A Jet Fuel. In August2010, the Group announced the signing of a strategic relationship agreement with Pacific Minerals; aHong Kong based Group, regarding the commercialization of its technology in China. The parties agreedto set up a joint venture company in China with the aim of identifying and progressing with commercialapplications of its technology. Algae.Tec is establishing strategic partnerships and alliances withinvestors, venture partners, customers and suppliers (materials, services, technologies) to acceleratethe achievement of the company‘s goals and objectives.Algae.Tec currently has MOUs with:– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in China– The Manildra Group for the first Australian plant– Leighton Contractors for engineering and project management expertiseThe company‘s strategy has been focused to assess competitive algae technologies to apply thedevelopment phase results to detailed engineering evaluations of commercial plant operations. Thedevelopment of unique algae technology has led to improvements in productivity, product yield, carbondioxide sequestration and substantial capital/cost savings versus agricultural crops and othercompetitive algae processes in the industry.The company is currently in the process of scaling up the technology to the next phase ofcommercialization with construction and operation of a demonstration Plant—Shoalhaven One—forperformance evaluations, product trials and technology marketing. The company has recently set up the18,200 square feet Algae Development & Manufacturing Centre in Atlanta where the photo-bioreactorswill be assembled for shipping to Shoalhaven Plant. Total developmental capital and operating costs forShoalhaven Plant are budgeted at AU$4MM with a scheduled start date in Q1-2012, and the firstcommercial plant is projected to launch by the end of 2013.The photo bioreactors will be employed atAlgae.Tec‘s demonstration plant. The plant is located at the Manildra Group‘s ethanol facility situated atNowra, 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 March 2011 Manufacturing plant operational in Atlanta April-August 2011 Module fabrication in Atlanta August 2011 Construction of Nowra commences October 2011 Shipment of Modules from Atlanta 2012 Q1 Start-up of Demonstration facilityThe initial two commercial facilities will be deployed in China and Australia. Considering the risingdemand for biomass in India, the company is equally inclined towards venturing in India. There are alsoworldwide 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:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Key Market TrendsAlgae properties: Algae is a group of aquatic estuarine and marine plant organisms, which may rangefrom microscopic (microalgae) to many meters in length. Algae potential is greatest in regions wherethere is an abundance of land, water, and sunlight. Studies show that algae species, which are primarilyunicellular or diatom microalgae has a potential for biofuels, meeting the general requirement for algaeproduction. These species are useful in producing:– Carbohydrate (sugar) compositions most suitable for ethanol production, or– Lipid (fats/oils) compositions which are suitable for production of biodiesel, or– Hydrocarbon compositions suitable for production of renewable distillates.The most abundant types/families of microalgae include Green, Diatom, Blue- Green and Golden Algae.Global growth prospects: The global market for Algae is poised for explosive growth in the next 10years reaching 61MM gallons per year and a market value of AU$1.3B by 2020 representing a CAGR of72%, roughly on par with early developments in the biodiesel industry.Globally, the United States is poised to ramp up production, being the earliest amongst world marketswith 50% of the total algae activity. The European Union (EU) market, accounting for about 30% ofalgae activity, will be limited initially by the industry‘s focus on university research, and later byinsufficient access to water, land, and nutrient sources.Technology: The company uses McConchie-Stroud technology system to produce algae-based biofuel.Currently, the company is pursuing the commercialization of this technology for algae production andprocessing system. Algae production comprises a series of critical processing steps, including supplysystems for carbon dioxide, light energy and nutrients, harvesting of biomass and refinement of algaeproducts.Products: Algae.Tec produces vegetable oil and a biomass of simple sugars and edible protein. Marketprices as of September 2011, for crude vegetable oil was more than US$1,200/T and for biomass priceswere more than US$500/T. Algae.Tec‘s pilot plant studies have shown that McConchie-Stroud system iscapable of delivering commercial projects of more than 1,000 modules which gives dry algae cropproductivity of 250MT per container module. This works out to be a total manufacturing cash cost ofapproximately US$200/MT which is less than US$40/barrel.For more details, refer to the Technologies and Markets sectionAlgae.Tec Limited – Arrowhead BID 7 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • News– Algae.Tec bioreactors receive approval for Australian facility: On October 18, 2011, the company announced that its demonstration plant, Shoalhaven One, received development approval under the Shoalhaven City Council Environment Planning and Assessment Act. The plant will be used to capture carbon dioxide waste from power stations and manufacturing facilities, feeding the pollution into the algae growth system. The permit is effective immediately, and after three years, Algae.Tec will have the option of expansion. Shoalhaven One will be sited next to the Manildra Group‘s industrial facility, south of Sydney, Australia.– Algae.Tec’s customer and site meetings in China and Germany: On July 18, 2011,the company announced that its managementreturned from customer and site meetings in China and Germany where there is interest in Algae.Tec‘s ability to produce algae as feedstock to manufacture sustainable fuels such as biodiesel and green jet fuel.– Algae.Tec technology uptake due to Australian price on carbon: On July 14, 2011, the company indicatedthat the introduction of a price on carbon by the Australian Government in its Clean Energy Future (CEF) package would accelerate uptake of the Algae.Tec technology by carbon dioxide emitting industries.The Algae.Tec enclosed modular technology captures carbon dioxide pollution from power stations and manufacturing facilities, which feeds into the algae growth system.– Algae.Tec’s demonstration to be collocated at Australian ethanol plant: On July 08, 2011, the company announced that it signed a collaboration contract with Australia‘s largest ethanol producer, the Manildra Group, to construct a demonstration-scale algae production facility in Nowra, NSW and the project could be operational by the first quarter of 2012. The company announced that Manildra is making several contributions to the project, including access to land and utilities. Algae.Tec‘s role in the project is to build the demonstration plant, and ensure safety and site regulations are met. The company intends to convert a percentage of the algae produced at the demonstration facility into biodiesel for use by Australia‘s armed forces. Alternatively, some of the algae feedstock will be converted into jet fuel and used for testing purposes in aircraft engines.– Algae.Tec to build demonstration Facility: On June 29, 2011, the company announced the construction of an algae demonstration facility in Shoalhaven One, in Nowra, south of Sydney, Australia. Algae.Tec signed the contract to build its proposed algae harvesting and production facility. ‗Shoalhaven One‘ will be at the Manildra Group‘s Nowra ethanol plant, the largest ethanol producer in Australia.– Algae Tec’s depositary Receipts commences trading on the USA OTC market: On April 28, 2011, the company announced its American Depositary Receipts (ADR) debut on the USA OTC market under the ticker ALGXY. The Bank of New York Mellon (BNY Mellon) was appointed to establish and manage the Level 1 American Depositary Receipt (ADR) Program.– Algae.Tec opens Atlanta Algae Development & Manufacturing Centre: On March 17, 2011, the company announced the opening of the Algae Development & Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled for shipping around the world. The Algae Development & Manufacturing Centre is an 18,200 square foot fabrication facility. The company‘s executive chairman said that the center is currently being modified to enable retrofitting system process of the 40 feet steel shipping container algae growth modules, ready for the first module delivery to the center in April.– Algae.Tec launches ADR Program: On March 17, 2011, the company announced; it had appointed the Bank of New York Mellon to commence the establishment of a Level 1 American Depositary Receipt program. The Executive chairman, Roger Stroud, said that the ADR program would give the United States energy and investors access to shares of the company, which is in a high growth phase establishing facilities in Australia and Asia.– Algae.Tec lists on Frankfurt Stock Exchange: On February 21, 2011, the company announced that it has been accepted to list on the Frankfurt Stock Exchange (FWB). The Executive chairman,Algae.Tec Limited – Arrowhead BID 8 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Roger Stroud said that the dual listing on FWB gives the company access to the most significant sustainable energy financial market. He also said that the company has a globally focused growth path so it is important to be part of the world‘s biggest investment facility covering the European Union and United States.– Algae.Tec lists on Australian Stock Exchange: On January 13, 2011, the company announced that it has listed on Australian Stock Exchange. On this occasion, the CEO of the company said that Algae.Tec will be the first algae company to list on a main board stock exchange in the world, and one of the few cleantech companies to be listed in Australia.– Algae.Tec targets Australias Cleaner Future for Power Stations Policy: On September 14, 2010, the company announced that it is targeting for inclusion in the Australian Governments Cleaner Futures for Power Stations Policy. Algae.Tec‘s Executive chairman, Roger Stroud said that he understood the carbon capture and algae growth and harvesting system should be eligible for the program which seeks to establish a best practice emissions standard for new coal-fired power stations. He said the company would be seeking high-level government meetings in a bid to have the technology included as an alternative to existing proposed carbon capture and storage options.– Algae.Tec signs MOU’s for China and Australia pre-listing: On August 26, 2010, the company announced two MOUs for non-binding commitments to deploy the technology in China and Australia. The company‘s Executive Chairman said that the MOU with Hong Kong Company Pacific Minerals Limited and Australian company RKD International Pty Ltd provides for the establishment with the objective of introducing company‘s technology to China.Listing InformationAlgae.Tec was listed on the Australian Stock Exchange on 13-Jan-2011 and was listed on FrankfurtStock Exchange on 21-Feb-2011. The company raised AU$5.1MM while issued 25.5MM shares at AU$20cper equity share. Algae.Tec‘s American depositary Receipts (ADR) commenced trading on the USA OTCmarket on 28-Apr-2011.ContactsRegistered office: Suite 9, 3 Centro Avenue, Subiaco, WA, Australia, 6008Telephone: +61 (08) 9380 6790Email: phatfull@algaetec.com.auMajor Shareholders Equity Holder No. of Shares Held (MM) Percentage HoldingTeco. Bio 200.00 80.35%Mr Peter Ernest Hatfull 9.61 3.86%Fmr Investments Pty Ltd 5.00 2.01%Moltoni Corporation Pty Ltd 4.38 1.76%Mcconchie Jeanette 2.40 0.96%Morrison Timothy 2.00 0.80%Chung Joseph 1.25 0.50%Hover Holdings Pty Ltd 1.25 0.50%Source: Bloomberg – 14 November 2011Algae.Tec Limited – Arrowhead BID 9 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Management and GovernanceThe management team at Algae.Tec comprises experienced professional with a proven track record.Mr. Roger Sydney Stroud Executive ChairmanMr. Roger S. Stroud has over 35 years experience in a variety of industries. He spent over 10 years infinance 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 foreight years. In the late 1990s, Roger began the process of building businesses in the renewable fuelsector, primarily biodiesel. This included floating two separate biodiesel companies. One of thesecompanies, Natural Fuel Ltd went into voluntary administration in April 2009. Roger was a director ofNatural Fuel Ltd until October 2007. He is a founding director and 50% shareholder of Teco.Bio LLC, andis based in Perth, WA.Mr. Garnet Earl McConchie Executive DirectorMr. Garnet Earl has over 35 years experience over a broad field of chemistry and associatedtechnologies, including global markets, bulk chemicals and plastics, differentiated commodities andintermediates, specialty chemicals, polymers and interaction with environmental sectors.Earl‘s field experience includes international business management, plant operations, and projectengineering in the United States, Europe (especially Germany, Holland, Switzerland, UK and CIS), LatinAmerica (Brazil, Argentina and Mexico) and Asia (Korea, China and Australia).Earl has over 10 years of specific technical and business experience in the biodiesel and glycerineindustry sectors. He is a founding director and controlling shareholder of Teco.Bio LLC, and is based inAtlanta, Georgia where he has coordinated the microalgae development.Mr. Peter Ernest Hatfull Managing Director & Company SecretaryMr. Peter Ernest has over 30 years experience in a range of senior executive positions with Australianand International companies. He has an extensive skill-set in the areas of business optimization, capitalraising 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 increasedprofitability. He has experience in turnaround and slow growth situations, where companies havestruggled to expand their business. This has required revitalising the business plan, attracting investorfunding, and implementing profitable strategies. Peter is currently a director of Teco Pty Ltd, KrestaHoldings Ltd, Barminco Pty Ltd and is based in Perth, WA.Mr. Timothy Morrison Non-Executive DirectorMr. Timothy is the current Director of Research and Development at Murdoch University. Tim representsthe University on the Boards of a number of companies engaged in the commercialization of UniversityIP. Mr. Morrison plays a role with a number of early stage clean tech companies supporting these groupsto raise early stage capital and structure merger and acquisition transactions. Through his engagementon an Australia-based private equity investment fund, Mr. Morrison plays a role in reviewing andinvesting in businesses seeking early stage venture finance.Prior to his current position, he was General Manager of MurdochLink Pty Ltd, the commercial arm ofMurdoch University, which is the dedicated provider of quality research consultancy services to theprofessions, industry and government.Algae.Tec Limited – Arrowhead BID 10 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Assets and Projectsvviviiviiiixx Algae Products End-Use Markets carbohydrates (sugars) to bio-Overview ethanolAlgae.Tec is focused on commercializing Production of bio-based polyolefin plastics.technology that produces algae at a very fastrate, to manufacture sustainable algae oil Proteins High protein content algae biomass for the animal food market(which is further used to produce vegetable oil,biodiesel and refined glycerine), biomass (used Hydrocarbons Production of renewable distillates via gasification for substitution ofto produce animal protein feed, bio-ethanol and diesel fuels.renewable distillates) and other nutrients suchas fatty acids. The company intends to initiate Biomass Feedstock source for biomass power generation with Substitutionthe development and operation of commercial of fossil fuelsfacilities in several countries, predominantly by Conversion of residual biomassway of joint venture with focus on Biodiesel and following oil extraction toGrade-A Jet Fuel. The company is building a renewable distillates.demonstration facility with Manildra to prove its Biomass nutrients suitable for usecommercial viability, the first modules of which in agricultural fertilizersare being built in the in Atlanta facility, are ontrack to be shipped to the Nowra site in October Vegetable Oil2011 and are expected to be operational in Q1- Microalgae such as higher plants produce2012. storage lipids in the form of triacyglycerols.The company produces high-yield algae growth Comparatively, algae produce more oil than anyand harvesting technology through the other oilseeds which are currently in use. ManyMcConchie-Stroud System. System is designed microalgae species can be induced toto cultivate algae virtually anywhere, including accumulate substantial quantities of lipids, oftenmarginal land or industrialized areas. The greater than 60% of their biomass.system is designed for scalability and minimal The table below presents indicative oil yieldsland footprint and water usage. Algae.Tec‘s from various oilseeds and algae.primary focus has been directed towardsmicroalgae as the most efficient photosynthesis Yields (Gallons of oil per acre per year)species for bio-fuels production. Corn 18 Algae Oil Vegetable Oil Market Soybeans 48 Biodiesel Biodiesel Market Algae Oil Safflower 83 Refined Glycerine Glycerine Market Sunflower 102 Rapeseed 127 CO2 Animal Animal Feed Market Jatropha 254 Protein Feed Nutrients Algae Production Biomass Bio-Ethanol Ethanol Market Oil Palm 635 Water Chemicals Renewable Distillates Diesel Fuel Market Micro Algae 5,000-15,000 Depending on the geographic region, the Fatty Acids Fatty Acid Market 125Mtpa vegetable oil market (primarily, palm, soybean and rapeseed oils), representing AU$ Algae Products End-Use Markets 110Bis growing between 3% and 5%. Approximately 80% of the vegetable oil demand Lipids/Oils Algae oil substitution of vegetable is for the food market, and consumer products oil feedstocks (e.g. soybean oil, palm oil) for biodiesel industry and feedstock for biodiesel production account Refined glycerine produced via for approximately 25Mtpa of the total demand. algae-biodiesel production Vegetable oil prices have historically followed Specialty oils and fatty acids. agricultural supply/demand balances, population Carbohydrates Substitution of agricultural sourced growth and standard of living; however, crude feedstocks for conversion of oil pricing has also significantly influencedAlgae.Tec Limited – Arrowhead BID 11 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • vegetable oil prices. Soybean and palm oil prices 12.5B liters per year. Europe is by far the(see chart below) have escalated approximately largest biodiesel market (approximately 80% of14% per year over the past five years and the the global market), followed by the U.S.A.trend continues. (approximately 15% of the global market). Biodiesel is registered and used as a direct Palm and Soybean Oil Prices (US$/MT) diesel fuel substitute and fuel additive, which is 1600 1400 most often marketed in blends of 5%-20%. 1200 Biodiesel provides important environmental 1000 advantages, e.g., carbon dioxide sequestration, 800 significantly reduced toxic exhaust emissions, 600 400 and has the highest ―energy balance‖ of any 200 transportation fuel. There are more than 500 0 biodiesel manufacturing plants worldwide with a Apr-05 total in-place production capacity of 37B liters Feb-04 Sep-04 Feb-11 Sep-11 Jul-03 Jun-06 Jul-10 Dec-02 Mar-08 Dec-09 Oct-01 Oct-08 Aug-07 Jan-07 Nov-05 May-02 May-09 per year. Soybean Oil Palm Oil The price of biodiesel is primarily driven by the following factors:Fatty Acid – The crude oil-derived diesel marketAnother very useful form of algae is fatty acid. – The level of government subsidy and,Fatty acid is a viscous, gum-like substance, – The price of biodiesel feedstock.derived from algae. It is also a very importantingredient in the manufacturing of papers and Gasoline & Diesel Price Movementstextiles. As it possesses most of the propertiesof gum, it is also used in the water-proofing and 5 4.5fire-proofing industry. It is especially helpful in 4 3.5making fabrics that are fire and water resistant. 3 2.5In the pharmaceutical industry, it is used in the 2 1.5manufacture of Gaviscon, Asilone, Bisodol etc. It 1is used as a mould-making material in life 0.5 0casting, prosthetics and dentistry. Like most of Feb-2008 Feb-2009 Feb-2010 Feb-2011 Aug-2007 Aug-2008 Aug-2009 Aug-2010 Aug-2011 Nov-2007 Nov-2008 Nov-2009 Nov-2010 May-2008 May-2009 May-2010 May-2011the forms or products of algae, alginic acid isused extensively in the food processing industryas an ingredient of soups and jellies. Gasoline Price Diesel PriceThe world production of fatty acids from thehydrolysis of natural fats and oils aggregates to Crude Oil Pricesapproximately5Mtpa, which represents an 160AU$3B per year market. The consumption of 140fatty acids is related to the growth in vegetable 120 100oils and economy of the region. The current 80fatty acid prices range from 50% to 70% of the 60 40vegetable oil prices, which is greater than 20AU$500/T on an average. 0 Aug 03, 2007 Aug 03, 2009 Aug 03, 2011 Aug 03, 2008 Aug 03, 2010 Nov 03, 2007 Nov 03, 2008 Nov 03, 2009 Nov 03, 2010 Feb 03, 2008 Feb 03, 2009 Feb 03, 2011 Feb 03, 2010 May 03, 2008 May 03, 2009 May 03, 2010 May 03, 2011BiodieselMost research into efficient algal-oil productionpredicts that biodiesel may be the only viablemethod to produce enough automotive fuel to Sources: Energy Information Administration – U.S.replace current world diesel usage. Continuous Department of Energy (EIA-DOE), U.S. Department ofbiodiesel production would get less expensive, Agriculture (USDA) Jacobsenmore competitive and become more Jet Fuelconsumers friendly. Current biodieselconsumption represents approximately 1% of The company intends to initiate thethe total vehicular diesel fuel demand globally at development and operation of commercialAlgae.Tec Limited – Arrowhead BID 12 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • facilities with primarily focus on Biodiesel and or to middle distillates via gasification andGrade-A Jet Fuel. By 2015, we expect Fischer-Tropsch synthesis. Biomass afterproduction capacity of bio-diesel based Jet-Fuel extracting oil contains about 40% to 60%to reach 900 MGY. carbon content dependent on the algae species and operating conditions in the form ofAirlines, which burn some 25 BGY of fuel, have carbohydrates, proteins and hydrocarbons.won regulatory approval for bio-fuel that meetsstandards set by the benchmarking group ASTM The animal feed market is a 180Mtpa marketInternational.On July 2011, Lufthansa became (AU$80B per year). The primary source forthe first airline in the world to use a bio-fuel mix animal protein feed in the U.S. is high proteinon scheduled services. The carrier used a 50:50 soybean meal, currently priced at approximatelymix between jet fuel and biosynthetic fuel AU$425/T. The residual algae biomass with highsources from jatropha, camelina plants and carbohydrate and protein contents offers aanimal fats made by Neste Oil and was used direct substitute for agricultural-based proteinwithout any modifications to aircraft or its sources.engines. EthanolIn 2010, companies like Choren, Rentech, and Ethanol from algae is produced by convertingSolena Group had announced commercial starch (the storage component) and celluloseprojects that could result in hundreds of millions (the cell wall component). Lipids in algae areof gallons per year of production capacity converted into biodiesel, while thecoming online by 2014.There are a number of carbohydrates are converted to ethanol. Algaecommercial hydroprocesing plants being built, are the optimal source for second generationmost notably by Neste Oil and ConocoPhilips. bio-ethanol due to the fact that they are high inGlycerine carbohydrates/polysaccharides and thin cellulose walls.Glycerine is a by-product in the process ofproducing biodiesel for pharmaceutical and The total global bio-ethanol consumption isconsumer products industries. From every 1 MT approximately 70B liters (55Mtpa) andof biodiesel 0.1 MT of glycerine is produced. represents an AU$35B biofuel market per year.Crude glycerine (80% content) is typically Bio-ethanol demand is set to double over theupgraded to refined glycerine (99.5 %+) for next 20 years. Ethanol prices correlate highlyfood, pharmaceutical and consumer product with ex-rack gasoline with current prices atapplications. The worldwide demand for AU$650/T.glycerine is over 1 Mtpa and continues to growat 5% per annum. The current glycerine marketis approximately AU$900MMper year atAU$750/T.BiomassAlgae biomass may be used directly or after oilextraction for a number of major applicationssuch as animal protein feedstock, agriculturalfertilizer, biomass power generation, and furtherbiomass conversion to ethanol via fermentationAlgae.Tec Limited – Arrowhead BID 13 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • and play an important role in fixing nitrogenTechnologies and Marketsxi from the atmosphere. – Golden Algae – Golden algae primarily existsAlgae in freshwater systems. They are very similarChemistry and Properties to diatoms but have more complex pigment systems.Algae is a group of aquatic estuarine and marineplant organisms, which may range from Algae as Energy Sourcesmicroscopic (microalgae) to many meters in Shooting prices of oil, increase in consumptionlength. They range from small single celled of fossil fuel, advances in technologyorganisms to multi-cellular organism, some with development and government‘s focus on globalfairly complex and differentiated form. Algae is warming have attracted demand for algae as ausually found in damp places and bodies of potentially rich source of sustainable biofuels.water and thus are common in terrestrial as well Algae are very beneficial as a renewable fuelas aquatic environment. There are more than resource because of the following advantages:30,000 fresh water and salt water species ofalgae. Approximately 1,000 algae species show – It has one of the most efficient and fastestthe potential for production of biofuels. production cycles, which converts solar energy and carbon dioxide into renewableMicroalgae and sustainable fuels.Studies shows that algae species which are – It is an environment friendly source ofprimarily unicellular or diatom microalgae has a producing energy. It efficiently sequesterspotential of biofuels, meeting the general atmospheric carbon dioxide, favorablyrequirement for algae production. These species balances greenhouse gas production andare useful in producing: reduces the long-term impact of global– Carbohydrate (sugar) compositions most warming. Also, it provides environmental suitable for ethanol production, or solutions for recovery of toxic stackgas pollutants and remediation of polluted water– Lipid (fats/oils) compositions which are streams. suitable for production of biodiesel, or – The production of oil per land mass is greater– Hydrocarbon compositions suitable for than any terrestrial crop and can be production of renewable distillates. cultivated virtually anywhere.These are the most primitive form of plants; – Also, the hydrocarbons derived from algaehowever the mechanism of photosynthesis is production can be used to produce renewablesimilar to that of higher plants. Due to simple biofuels for direct substitution of fossil fuels.cellular structure and growth in aqueousenvironment with more efficient access to water, Global Algae Market Opportunitiescarbon dioxide and nutrients, microalgae are far The global market for Algae is poised formore efficient converters of solar energy. explosive growth in the next 10 years reachingBiologists have categorized algae into a variety 61MM gallons per year and a market value ofof classes on the basis of pigmentation, life cycle AU$1.3B by 2020, representing a CAGR of 72%,and basic cellular structure. The most abundant roughly on par with early development in thetypes/families of microalgae include: biodiesel industry. Algal bio-fuels have matured– Green Algae – They generally exhibit high significantly in the last few years, moving from growth rates and are considered as the small research labs, to pilot projects, to small evolutionary progenitors of modern plants. scale demonstration projects, and now to first- Carbohydrates and natural oils (lipids) are stage pre-commercial trials for CO2 capture in a the main storage compounds for green algae. handful of projects.– Diatom Algae – Found in oceans, they are Globally, the United States is poised to ramp up rich in silica in the cell walls and store carbon production the earliest amongst world markets, primarily in the form of natural oils or with 50% of all algae activity. The European carbohydrates. Union (EU) market, accounting for about 30% of– Blue-Green Algae – They are found in algae activity, will be limited initially by the freshwater and marine environment habitats industry‘s focus on university research, and laterAlgae.Tec Limited – Arrowhead BID 14 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • by insufficient access to water, land, and Technologynutrient sources. It is believed that United The company uses McConchie-Stroud technologyStates and Europe cannot grow enough corn, system to produce algae-based biofuel.soy, or rapeseed to meet there bio-fuel targets. Currently, the company is pursuing theLatin America and Asia Pacific, which have fewer commercialization of this technology for algaeprojects in operation today, are set to gain production and processing system.significant market share in the long run. McConchie-Stroud System has achievedUltimately, algae potential is greatest in regions exceptional algae productivity and yields of algalwhere there is an abundance of land, water, and products during the research and developmentsunlight. Secondary considerations include phase due to the following:favorable regulations around biofuels mandates,greenhouse gas (GHG) emissions, wastewater Innovative Light System: Contains a noveltreatment, and livestock operation, as well as lighting system for optimal provision of light forpotential co-location opportunities (wastewater growth of algae.remediation and carbon recycling). Algae is Modular Reactor: Enables growth of algae to bebecoming one of the most promising sources of easily controlled and optimized.biodiesel as it is biodegradable and can beproduced using ocean and waste water without Controlled Environment: Enables a nutrient richdepleting fresh water resources. atmosphere for better growing of algae.The industry believes that the algae-based Algae are micro organisms that containbiofuels market will be characterized by regional chlorophyll, and with water, carbon dioxide andcollaborations and partnerships that are able to sunlight they produce complex carbon chaincapitalize on efficiencies through expertise molecules such as hydrocarbons andrelated to unique environmental conditions, co- polysaccharides and proteins. The compositionlocation opportunities, and access to end of algae product is dependent on the specificmarkets. This horizontal organization will result species utilized and the photo-synthesisin significant consolidation within the market operating conditions employed. Algae productsover the next decade. contain 45%-80% of carbon content in the form of lipids/oils, carbohydrates, proteins andAlgae are attracting increased investments and hydrocarbons.interests from bio-fuel, petroleum andagribusiness industries. Driven by escalating Algae Productionglobal climate change concerns and the risingcost of petroleum-based energy, companies and Algae production comprises a series of criticalgovernment entities are developing the use of processing steps, including supply systems forbio-fuels derived from algae to reduce carbon carbon dioxide, light energy and nutrients,emissions from power plants and generate harvesting of biomass and refinement of algaerenewable transportation fuels. products.Using an intricate process of photosynthetic, The company developed and utilized processcompanies have developed biodiesel and ethanol simulation models for evaluation of the algaefrom algae that, given optimal conditions, can process and its downstream bio-fuels, includingdouble its volume overnight. Up to 50% of an detailed material and energy balances, processalgas body weight is comprised of oil, whereas flow diagrams, unit and equipment design andoil-palm trees - currently the largest producer of specifications, plant lay-out and turnkey capitaloil to make bio-fuels - yield just about 20% of estimates. Based on the development phasetheir weight in oil. results, engineering design and process simulation modeling, material and energy balance data are presented in the process flow diagram for a typical algae plant.Algae.Tec Limited – Arrowhead BID 15 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • 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 AreasThe 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 RecycleGas 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 CollectionLight Energy Solar energy in the form of visible light absorbs and Visible Light Filtration & DistributionSupply converts CO2 to produce algae. Energy Recovery/Storage Water Supply (fresh, marine and/or Preparation units for water supply, nutrient package, wastewater)Raw Material alkalinity control and make-up algae. Alkalinity ControlSystems Nutrients, Nitrogen and Phosphorus are formulated via Nutrient Preparation Unit addition of industrial fertilizers. Make-up Algae Control System Modular Photo-ReactorsModular Photo- Photosynthesis bio-reactor system controls the overall Internal Light Distribution NetworkReactors productivity and desired product yields per species. 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 HandlingHarvesting Recovery methods for algal cell fracturing and direct Mechanical Separation Units recovery of hydrocarbon products provide improved overall energy efficiencies. Algae Biomass RefinementAlgae.Tec Limited – Arrowhead BID 16 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Process Steps Process Description Key Unit Operations Algae biomass contains predominantly lipids (fats/oils) and carbohydrates Oil Extraction Units Conventional oil extraction technologies (mechanical Crude Algae Oil TreatmentProduct expeller and/or solvent extraction) are employed toRefinement 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 (andDownstream glycerine). Biomass Animal Food ProductsProducts Biomass is a source of animal feed, ethanol and other Ethanol Production energy sources. Middle Distillates Production Power Generation via Biomass GasificationAlgae.Tec Limited – Arrowhead BID 17 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Porter’s Five Force Analysis for the Biofuel industry in AustraliaOverviewAustralia‘s algae oil rush is fueled by a combination of tough emission control standards and state-by-state bio-fuel mandates. Carbon emitters will pay an AU$23/T tax starting in 2012, which accelerated aboom for carbon capture and bio-fuels. The bio-fuel consumption increased 34% from 2009 to 2010.The Manildra-Algae.Tec demonstration offers both emission control as well as bio-fuel. Algae Tecphotobioreactor modules will use carbon dioxide (CO2) produced by ethanol processing to feed algae,which consumes two parts CO2 for every part algae produced. Barriers to Entry High • High Capital Investment • High-end scientif ic expertise • Patented Technologies • Economic Viability of new technologies Power of Customers Low Power of suppliers Low Customer base is spread • Engineer ing Suppliers (to Industry competition Medium across industr ies – which give build the production unit) will less control to any particular hold key to the systems built • The existing players are highly industry. (repairs & maintainance) experienced and very f ew in number. • Aviation industry: shif t to • Bargaining power: other • The success of the industry is on biodiesel due to pressures suppliers will be dependent on based on technological expertise and from clean energy and the type of technology used. the strong R&D team . emission standards For instance, Solazyme uses • Some of the players already have • Glycerine: used extensively Sugar/ Starch to cultivate grants from govt. to supply f uel f or in pharmaceutical and algae whereas Algae.Tec uses them and also contracts f rom various consumer product industry - light, w hich reduces the airlines growing around 5% every supplier bargaining power. year • Vegetable oil: Algae would be pref erred as it produces 10- 100 times oil in the same area as crops Threat of substitutes Low • Algae is the best available substitute f or oils – biodiesel and vegetable oil ,and various other uses in paper and textile industryAlgae.Tec Limited – Arrowhead BID 18 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Financing Risk – MEDIUMProject Risk Profile Analysis The company is in its initial stages ofPeer Risk Analysis development. The company is building a demonstration facility and there is no guaranteeWe have evaluated the risk profile of Algae.Tec that current available funds will be sufficient forcompared with other biofuel players in Australia. fulfilling the initial business objective, with aWe identified the risk as ―Medium‖ on a major portion standing utilized. The company willcomparative basis and assigned a score of ―2‖ be required to raise additional funds in the futurebased on the risk profile of the major projects and faces the risk of obtaining it on terms whichpursued by the company as well as its peers. The are favorable to the company. Additionally, theimportant risk categories considered for the study funds may not be sufficient to enable theinclude: company to fully commercialize the McConchie–– Project Stage Risk: Medium - Near feasibility Stroud System.– Intellectual Property Risk: Medium – Yet to be The funds raised through equity have been used patented for the establishment of a first class research and development and commercial facility. On 17– Financing Risk: Medium – Commercialization March 2011, Algae.Tec Limited announced the of Technology yet to be done opening of its 18,000sq ft facility in Atlanta– Operational Risk: Medium – dependent on Georgia. technology used Any additional equity financing will diluteThe Risk Profile has been assessed as a weighted shareholders interest, and debt financing, ifblended score based on the project stage risk available, may involve restrictions on financing(30% weight), intellectual property risk (30%), and operating activities. If the company is notfinancing risk (20%), and operational risk (20%). able to obtain additional financing, it may be required to reduce its scope of operations andThe individual risk parameters and the underlying scale back its expansion and developmentrationale for the scores are discussed in the programs.subsequent sections. Success of the McConchie-Stroud System -Peer Risk Profile HIGH Total Project Intellectual Financing Operational The company is relying on the success of itsTicker Risk Stage Property Score Risk Risk Risk Risk McConchie-Stroud system and believes that it will be able to develop and commercialize the systemAEB 2 2 2 2 2 in the near future. Though the company hasPALG 1.4 1 1 2 2 shown excellent results during its research andSZYM 1.2 1 1 1 2 development phase, it still faces the risk of commercialization of algae products from theIntellectual Property Risk - MEDIUM McConchie-Stroud system.The company has not obtained a patent in Key Personnel - MEDIUMrelation to the McConchie-Stroud System so far.There is no surety that the current patent The company faces the risk of losing its two keyapplication in Australia for the McConchie-Stroud directors, Messrs McConchie and Stroud, whowill be granted, or that any other patent developed the McConchie-Stroud system. Whileapplications that may be lodged in relation to the these directors are the major shareholders in theMcConchie–Stroud system will be granted. company, non involvement of either of them will adversely hamper the company‘s future plans.There is always a risk of a third party bringing aclaim in relation to any aspect of the property. Operational Risks- MEDIUMAny dispute will adversely affect the company. The company‘s demonstration and commercialHowever, the company has taken reasonable plants proposed by the company may be affectedsteps to protect the ownership of the intellectual by various factors, including failure to locate aproperty related to the McConchie-Stroud and suitable location, failure to achieve predictedbelieves that there is no third-party interest.Algae.Tec Limited – Arrowhead BID 19 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • yields of algae and algae products, operational profits, but with no direct exposure to capitaland technical difficulties encountered in scaling up requirements.the McConchie–Stroud system to commercial The company has two hector demonstrationproduction level. The company also faces the risk facilities in Florida, while it has done testing of itsof unanticipated bioreactor problems which may fuel produce along with Siemens and theaffect the production cost. University of Utah.Apart from the above risks, the company faces Solazyme Inc.the risk of adverse weather conditions, industrialand environmental accidents, currency risk and The San Francisco-based, Solazyme Inc., growsindustrial disputes. algae with sugars in closed fermentation tanks to create oils, which can be used for liquid fuel andPeer Profile for chemicals, foods, or personal care products. Solazyme proprietary microalgae arePetroalgae Inc. heterotrophic, meaning they grow in the dark (inPetroalgae Inc. is a Melbourne-based algae fermenters) by consuming sugars derived fromproduction firm that has lemna as its main plants that have already harnessed the sunsoutput. It is easier, at present, to grow, harvest energy. By using standard industrial fermentationand dewater lemna than the unicellular algae equipment, theyre able to efficiently scale up andharvested by Algae.Tec. Lemna shares with accelerate microalgaes natural oil production timemicroalgae, a rapid growing rate and ability to to just a few days and to commercial levels.generate large amounts of usable biomass on The companys strategy has been to make oils fornon-productive land. specific personal care and nutritional marketsThe company is planning to optimize the growth before taking on liquid fuels where there isof indigenous micro-crops with open tanks at margin pressure and brands play a major role. Itcommercial scale through the management of has customers for food and personal care and waslight exposure and other elements of the awarded a Department of Energy grant to makeenvironment. The technology monitors variable fuel for use by the Navy, which successfullyparameters, including light, temperature, density tested a 50-50 blend of petroleum and algae oil.and nutrition, to determine the optimal point in Solazyme has development arrangements withthe growth cycle at which the biomass should be airlines Qantas, Chevron Technology Ventures,harvested. and with chemical company Dow.The company plans to generate licensing fees and Solazyme signed an agreement with Bunge forroyalties from customer licensees in the global commercial renewable oil plant in Brazil. This JVenergy and agriculture markets. They would planning to build 100,000MT renewable oilconsider entering into alternative arrangements in production facility located at Bunge owned sugarwhich license fees and royalties would be reduced cane mill in Brazil.in place of a greater share of the operation‘sAlgae.Tec Limited – Arrowhead BID 20 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Risk Parameters – Definition biofuel companies. Debt is considered only as a last option to the public issue due to highProject Stage Risk financing charges as well as financial covenants attached.Arrowhead understands the different projectstages for this business model to be: We consider a project to be of lower risk profile if demonstration plant is successfully completed and– Laboratory Research: Deals with research yields desired results as the viability of the project and development (R&D) of the project. will be proved.– Pilot Tests: Initial tests of the R&D results are carried out for the technical, commercial, Intellectual Property Risk and economic feasibility of the project. The technology used for the culture, and– Demostration Plant: The Plant will be of harvesting of algae and the production are highly much high capacity than of the pilot tests and dependent on the company‘s research and intends to prove the commercial feasility of technical capabilities and are mostly developed in- the project. house. In-house developments generally involve huge R&D expenditure which they aim to recover– Commercial Plant: Based on market from future revenues. prospects the commercial plant with required capacity will be developed for the production. We consider a project to be of lower risk profile if the technology possesses all necessary patents.We consider a project to be of lower risk profile ifdemonstration plant is successfully completed and Operational riskyields desired results and a commercial plant isunderway as the uncertainty regarding the Depending on technology, the input used for thecommercialization of the project reduces culture of algae would be light or sugar/starch.significantly. The technology using light as its input for culture will need to set up the necessary infrastructureProject Financing Risk whereas when the input is sugar/starch, there is an additional uncertainty with respect to the costThe projects in this industry are very capital and availability of the input.intensive. Therefore, this business model, ingeneral suffers for financing risk as the viability of Since the culture of algae is technology driven,the project is known only at a later stage, when we see the risk emerging from system break-half of the capital outlay is done. down requiring technical expertise.The industry has most of the initial projects We consider a project to be of lower risk profile iffinanced by private equity firms or venture its input available at lesser cost than its peerscapitalists. Other important source could be input and is available in abundance.equity financing as resorted to by most startupAlgae.Tec Limited – Arrowhead BID 21 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Market Enterprise Project Financing Algae.Tec in comparisonCompany Ticker Major Projects cap value Stage information with peer (AU$MM) (AU$MM) Algae.Tec is in its initial stages IPO closed in when compared to its peers. December It is currently building a demo 2010 for plant whereas Petroalgae has AU$5m1 an operational demo plant and Accepted for Solazyme has a fully listing on commercial plant in place. Demo Plant with Building a FrankfurtAlgae.Tec AEB 87.12 84.69 Algae.Tec‘s demo plant is Manildra demo plant Stock made along with Manildra, the Exchange in largest Ethanol producer in February 2011 Australia. In April 2011 Algae.Tec has also received company recognition from aviation announced its industry for its fuel demo ADR plant with Manildra. Algae.Tec is in its developing Ministry of Natural IPO underway stages while Petroalgae has a Resources for the functional demo plant in Republic of Active Demo Currently place. Algae.Tec is currentlyPetroAlgae PALG managed by 757.93 817.41 Suriname Plant in US building a demo plant for Private equity commercialization of algae Biomass fuel test firms production, which will be functional in early 2012. Chevron Technology Ventures IPO in 2011 in May 2011 for Algae.Tec is in its infant stage Marine Diesel fuel Commercial $18 per share. for US NAVY when compared to Solazyme,Solazyme SZYM Plant 661.74 425.14 which has a functional Joint – 50:50 Renewable between the commercial plant supplying chemicals project fuel to US Navy. Nutrition products partners Skincare Products 1 The IPO issue closed in December 2010 once the minimum of AU$5 million and 500 shareholders had been achieved. Shares were issued at AU$0.20 with 28.35MM receiving quotation. With another 219.58MM shares being issued to original founders and seed investors which were subject to restriction agreements, the total shares on issue post listing were 247.92MM and giving a market capitalization at listing of AU$49.58MM. By October 2011 the shareholders have grown to approximately 750 and the market capitalization to approximately A U$90 million, a very positive result in a very negative market period. Algae.Tec Limited – Arrowhead BID 22 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 27 of this report.
    • SWOT Analysis Strengths Strong Management team with core competencies in biofuel technologies, energy markets, project commercialization and business management. Developed McConchie-Stroud System Weaknesses which cultivates high yield algae and economically harvests them. The McConchie –Stroud System is Technology facilitates algae yet to tested for its Opportunities cultivation even in marginal land or commercialization with a demo industrialized areas plant. The demo plant will be Global market for Algae is poised operational by early 2012 for explosive growth in the next 10 years, demand reaching 61MM Unanticipated bioreactor problems gallons per year of bio-fuel and a SWOT may affect the production cost market value of AU$1.3B by 2020 once the production is Aviation industry is looking for commercialized clean fuels to reduce carbon Threats footprints and also to reduce fuel costs The McConchie –Stroud System is Reduced cultivation area will yet to obtain the patent for the increase demand for vegetable oil Quantum Fracturing Technology from algae; which produces 10- used 100 times per acre of land compared to crops Messrs McConchie and Stroud, directors and major shareholders, developed the McConchie-Stroud system. Non involvement of either of them could adversely hamper the company’s operationsAlgae.Tec Limited – Arrowhead BID 23 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • ValueThe Fair Market Value for Algae.Tec shares stands between AU$375.3MM to AU$532.2MM.The Fair Market Value for one of Algae.Tec publicly traded shares stands between AU$1.51 to AU$2.15.Algae.Tec Balance Sheet ForecastCONSOLIDATED all figures in 000 AU$, Low bracket estimatesBALANCE SHEET unless stated differently year ending June 30 2012E 2013E 2014E 2015E 2016E 2017E 2018ETotal Current Assets 3,741 19,797 63,839 106,195 149,205 193,000 237,589Total Non-Current Assets 29,815 55,633 52,574 49,682 46,949 44,367 41,927TOTAL ASSETS 33,556 75,430 116,413 155,877 196,154 237,367 279,516Total Current Liabilities - 1,603 3,598 3,670 3,743 3,818 3,895Total Non-current Liabilities 22,400 44,800 44,800 44,800 44,800 44,800 44,800TOTAL LIABILITIES 22,400 46,403 48,398 48,470 48,543 48,618 48,695Total Shareholders‘ Equity 11,156 29,027 68,014 107,407 147,611 188,749 230,822TOTAL LIABILITIES and EQUITY 33,556 75,430 116,412 155,877 196,154 237,367 279,516Important information on Arrowhead methodologyThe principles of the valuation methodology employed by Arrowhead BID are variable to a certainextent, depending on the sub-sectors in which the research is conducted. But all Arrowhead valuationresearches possess an underlying set of common principles and a generally common quantitativeprocess.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 coherentlydetermined forecast period.Elements of past performance such as price/earning ratios, indicated as applicable, are mainly forreference. Still, elements of real-world past performance enter the valuation through their impact on thecommercial 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 methodologyapplied towards building the fair value bracket, is presented here as additional information.Arrowhead BID Fair Market Value BracketThe Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variableanalyses such as key price analysis for revenue and cost drivers or analysis and discounts on revenueestimates for projects, especially relevant to projects estimated to provide revenue near the end of thechosen 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 withthe high bracket in the Arrowhead Fair Value Bracket, and, likewise, in terms of low estimates. Theinvestor will also note the company intangibles to analyze the strengths and weaknesses, and otheressential company information. These intangibles serve as supplementary decision factors for adding orsubtracting a premium in investor‘s own analysis.The bracket should be taken as a tool by Arrowhead BID for the reader of this report and the readershould not solely rely on this information to make his decision on any particular security. The readermust also understand that while on the one hand global capital markets contain inefficiencies, especiallyin terms of information, on the other, corporations and their commercial and technical positions evolverapidly. This present edition of the Arrowhead valuation is for a short to medium-term alignmentAlgae.Tec Limited – Arrowhead BID 24 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • analysis (one to twelve months). The reader should refer to important disclosures on page 27 of thisreport.Information on the Algae.Tec valuationAlgae.Tec Valuation Methodology:The Arrowhead fair valuation for Algae.Tec is based on thediscounted 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 periodchosen for the valuation is ~128 months (2012-2022). While revenue is expected to ramp upsignificantly during the 2013-16, the later years are heavily discounted and have a marginal effect onvaluation, which are included primarily to present a full project cycle situation.Underlying Business Plan: Algae.Tec limited is establishing strategic partnerships and alliances withinvestors, venture partners, customers and suppliers (materials, services, technologies) to accelerateachievement of the company‘s goals and objectives. Algae.Tec currently has MOUs with:– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in China– The Manildra Group for the first Australian plant– Leighton Contractors for engineering and project management expertiseThe initial two commercial facilities will be deployed in China and Australia. Considering the risingdemand for biomass in India, the company is equally inclined towards venturing in India. The companyplans to invest IPO proceedings in building demonstration facility. It has inaugurated Algae Development& Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled. Algae.Techas applied for patents in relation to McConchie-Stroud System, which would cement its technologicalcore competency.Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 0%, representingthe maturity, technology change and prospective competiveness in the business.Prudential Nature of Valuation: This Arrowhead Fair Value Bracket estimate is a relatively prudentialestimate, as it discounts the eventuality of the company acquiring and producing from any projects otherthan Manildra - Algae.Tec Demo Plantbefore 2021.Algae.Tec Limited – Arrowhead BID 25 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Key variables in Algae.Tec revenue estimationsVariable 1 – Modules ConstructedArrowhead has forecasted the modules construction capacity in lines with the company‘s estimates. Webelieve the company will install the first module and will go operational from 2013. Overall, we haveremained conservative in estimating the number of modules considering some level of uncertainty infuture revenue generation. Additionally, financing and technology risk could adversely impact thecompany‘s potential revenue generation or could delay the company‘s revenue-related strategy. 2013 2014-2020 2021-2025 Low 250 550 650 High 300 650 700Variable 2 – Algae Production per ModuleArrowhead believes that the low and high estimates of cultivation of algae from one module are 225Tand 250T per year respectively, maintaining it close to company‘s estimates.Variable 3 – Algae Oil, Biomass and Other Nutrients PricesArrowhead has forecasted the following low end and high end price range for the three products:- Project Low end (AU$/mt) High end (AU$/mt) Algae Oil 1,175 1,225 Biomass 375 425 Fatty Acid (Other nutrients) 400 450Algae oil is a substitution of soya and palm oil which are used as raw material for biodiesel production.Currently, soya oil and palm oil are trading in a range of AU$1250/T to AU$1300/T. We have assumedthat algae oil would sell at a discount of around 10% to soya oil and palm oil prices since it‘s a new inputfor bio diesel production.Biomass can be substituted by high protein soybeans and corn which currently trade at AU$300/T andAU$550/T, respectively. We have used the average of these two prices to arrive at the selling price ofthe biomass produce.Currently fatty acid trades at around AU$300/T. We believe algae fatty acid output would fetch a similarprice.Algae.Tec Limited – Arrowhead BID 26 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Analyst Certifications and Important Disclosures objectives and financial situation utilizing theirAnalyst Certifications own financial advisors as they deem necessary.This report was prepared by a team of analysts. Investors are advised to gather and consult multiple information sources before makingI, Thomas Renaud, certify that all of the views investment decisions. Recipients of this reportexpressed in this research report accurately are strongly advised to read the information onreflect my personal views about the subject Arrowhead Methodology section of this report tosecurity and the subject company. I also own at understand if and how the Arrowhead Duethis point in time a long equity position in Diligence and Arrowhead Fair Value BracketAlgae.Tec. integrate alongside the rest of their stream of information and within their decision takingI, Rashmi Shah, certify that all of the views process.expressed in this research report accuratelyreflect my personal views about the subject Past performance of securities described directlysecurity and the subject company. or indirectly in this report should not be taken as an indication or guarantee of future results. TheImportant Disclosures price, value of, and income from any of theArrowhead Business and Investment Decisions, financial securities described in this report mayLLC received fees in 2011 from Algae.Tec for rise as well as fall, and may be affected byresearching and drafting this report and for a simple and complex changes in economic,series of other services to Algae.Tec, including financial and political factors.distribution of this report and networkingservices. Two of Arrowhead‘s partners including Should a security described in this report beThomas Renaud, own long equity positions in denominated in a currency other than theAlgae.Tec. investor‘s home currency, a change in exchange rates may adversely affect the price of, value of,Aside from certain reports published on a or income derived from the security.periodic basis, the large majority of reports arepublished by Arrowhead BID at irregular This report is published solely for informationintervals as appropriate in the analyst‘s purposes, and is not to be considered as an offerjudgment. to buy any security, in any state.Any opinions expressed in this report are Other than disclosures relating to Arrowheadstatements of our judgment to this date and are Business and Investment Decisions, LLC, thesubject to change without notice. information herein is based on sources we believe to be reliable but is not guaranteed byThis report was prepared for general circulation us and does not purport to be a completeand does not provide investment statement or summary of the available data.recommendations specific to individualinvestors. As such, any of the financial or other Arrowhead Business and Investment Decisions,money-management instruments linked to the LLC is not responsible for any loss, financial orcompany and company valuation described in other, directly or indirectly linked to any pricethis report, hereafter referred to as ―the movement or absence of price movement of thesecurities‖, may not be suitable for all investors. securities described in this report.Investors must make their own investmentdecisions based upon their specific investmentAlgae.Tec Limited – Arrowhead BID 27 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Valuation WACC Risk-free rate 4.21% xii Production/ Algae Biomass Other Beta 0.80 xiii Module Risk premium 6.0% xiv Max 225 1175 375 400 1.0% xv value Additional Risk Premium Cost of Equity 9.8% xvi Min 1225 250 425 450 Terminal Growth Rate 0% xvii value FCFE (High) Time Period --> 0.83 1.83 2.83 3.83 4.83 5.83 6.83 7.83 8.83 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net cash from operating (3,759) 20,251 48,899 64,690 65,529 66,560 67,615 68,696 69,804 activities Capital Expenditure (33,000) (32,000) (2,782) (2,629) (2,484) (2,347) (2,218) (2,096) (1,981) Net Debt Addition 22,400 22,400 - - - - - - - Free Cash Flow to Equity (14,359) 10,651 46,117 62,062 63,045 64,212 65,397 66,600 67,823 Discount Factor 0.86 0.78 0.71 0.65 0.59 0.54 0.49 0.45 0.41 Present Value of FCF (12,310) 8,325 32,865 40,324 37,347 34,682 32,204 29,902 27,764 FCFE (Low) Time Period --> 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net cash from operating (3,759) 14,825 33,582 44,913 45,420 46,067 46,732 47,415 48,116 activities Capital Expenditure (33,000) (32,000) (2,782) (2,629) (2,484) (2,347) (2,218) (2,096) (1,981) Net Debt Addition 22,400 22,400 - - - - - - - Free Cash Flow to Equity (14,359) 5,225 30,800 42,284 42,936 43,720 44,513 45,318 46,135 Discount Factor 0.86 0.78 0.71 0.65 0.59 0.54 0.49 0.45 0.41 Present Value of FCF (12,310) 4,084 21,949 27,474 25,435 23,614 21,920 20,347 18,886 ARROWHEAD FAIR VALUE BRACKET AU$/share Contribution by Key Variable High Low 2.50 Terminal Value (TV) 766,365 568,843 2.00 Present Value of TV 257,206 190,914 Present Value of FCF + TV 538,160 378,702 1.50 + Cashxviii 2,413 2,413 Equity Value Bracket 540,573 381,116 1.00 Shares Outstanding (in 000)xix 248,922 248,922 0.50 Fair Value Bracket AUD 2.17 AUD 1.53 Current Market Price AU$0.35 AU$0.35 - Current Market Capitals 87.1 87.1 Low Algae Oil Biomass Other High Target Market Capital 540.6 381.1 NutrientsAlgae.Tec Limited – Arrowhead BID 28 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.
    • Notesi Arrowhead Business and Investment Decisions Fair Value Bracket - AFVBTM. See information on valuation on pages 24-28 of this report and important disclosures on page 27 of this reportii Source: Bloomberg - 15-November-2011iii Source: Bloomberg - 15-November-2011iv Source: Bloomberg 3 month volume – 15-November-2011v Source: http://oakhavenpc.org/cultivatingvi Source: http://www.indexmundi.com/commodities/?commodity=soybean-oil&months=120viiSource: http://www.indexmundi.com/commodities/?commodity=palm-oil&months=60viiiSource: http://oilprice.com/Alternative-Energy/Biofuels/The-Growing-Market-for-Biodiesel-and-Bio-Oils.htmlixSource: http://www.tcbmag.com/peoplecompanies/companies/127267p1.aspxx Source: http://www.greentechmedia.com/articles/read/commercial-jet-fuel-sooner-than-we-think/xiSource:http://www.emerging-markets.com/algae/Algae2020StudyandCommercializationOutlook.pdf; http://www.energybusinessreports.com/shop/item.asp?itemid=1450xiiAustralianGovernment 10 year bond yieldfrom Bloomberg as on 15-November-2011xiiiArrowhead EstimatesxivArrowhead EstimatesxvArrowhead EstimatesxviArrowhead EstimatesxviiArrowhead Estimatesxviii June 30, 2011xix Management commentAlgae.Tec Limited – Arrowhead BID 29 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 27 of this report.