Algae.tec abid report - 06 sep11

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Algae.tec abid report - 06 sep11

  1. 1. Due Diligence and Valuation ReportArrowhead Code: 10-01-03Coverage initiated: 23 March 2011This document: 06-09-2011 Company: Algae.Tec LimitedFair share value bracket: AU$1.51 to AU$ 2.15i Ticker: ASX:AEB, OTCBB:ALGXYShare price on date: AU$0.33ii Headquarters: Perth, AustraliaAnalyst TeamThomas Renaud Rashmi Shah Executive Chairman: Mr. Roger Sydney Stroudthomas.renaud@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: 32,496iv Exchange. On 28thApril 2011, the company’sMarket Cap. on date: AU$81.81MM American Depositary Receipts (ADR) commenced trading on the USA OTC market under the tickerFinancial Forecast Data (in AU$) 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, (2.77) 10.99 23.63 23.87 24.33 24.86 25.39AU$ 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 (2.77) 7.21 15.73 15.89 16.22 16.59 16.97 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 Malindra 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-Algae.Tec is in the process of establishing fuel targets. Latin America and Asia Pacific, whichstrategic partnerships and alliances with have fewer projects in operation today, are set toinvestors, venture partners, customers and gain significant market share in the long run.suppliers to accelerate achievement of thecompany’s goals and objectives. In addition, the Arrowhead believes that Algae.Tec has enormouscompany has recently set up the 18,200 square growth potential with a medium risk profile.foot Algae Development & Manufacturing Centre Based on intrinsic revenue capacity from 500in Atlanta where the photo-bioreactors will be modules, Arrowhead believes that the company’sassembled for shipping around the world. fair share value lies in the AU$1.51 to AU$2.15 bracket.Algae.Tec Limited – Arrowhead BID 1 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  2. 2. Table of ContentsAlgae.Tec Presentation ..................................................................................................... 3 News .................................................................................................................................7 Listing Information ........................................................................................................... 8 Contacts ............................................................................................................................8 Major Shareholders ........................................................................................................... 8 Management and Governance ...........................................................................................9 Assets and Projects ......................................................................................................... 10 Technologies and Markets ............................................................................................... 13 Porter’s Five Force Analysis for the Biofuel industry in Australia ....................................17 Project Risk Profile Analysis............................................................................................ 18 Peer Profile .....................................................................................................................19 SWOT Analysis ................................................................................................................ 22 Value ............................................................................................................................... 23 Analyst certifications ...................................................................................................... 26 Valuation ......................................................................................................................... 27 Algae.Tec Limited – Arrowhead BID 2 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  3. 3. 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 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 now building a demonstration facility with Malindra to prove its commercialviability, which is expected to be completed 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. Biodiesel provides importantenvironmental advantages and has the highest “energy balance” of any transportation fuel. The totalglobal in-place production capacity of biodiesel is 37B liters per year, with price driven by and dependenton crude oil, government subsidy and price of biodiesel feedstock.It is estimated that algae produces more oil than any other oilseeds currently in use. For instance, 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 Limited – Arrowhead BID 3 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  4. 4. 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.Technology - 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.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.Financing Requirement: The company is currently building a demonstration facility; it is quite possiblethat the current available funds may not be sufficient for fulfilling the initial business objective. Also thefunds are not sufficient to enable the company to fully commercialize the McConchie – Stroud System.Inability to obtain additional financing may require reducing its scope of operation and scaling back itsexpansion and development programs.Algae.Tec Limited – Arrowhead BID 4 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  5. 5. 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 StrategyAlgae.Tec is establishing strategic partnerships and alliances with investors, venture partners, customersand suppliers (materials, services, technologies) to accelerate the achievement of the company’s goalsand objectives.Algae.Tec currently has MOUs with:– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in China– The Malindra 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. Total developmental capital andoperating costs 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 at Algae.Tec’s demonstration plant. The plant is located atthe Malindra Group’s ethanol facility situated at Nowra, south of Sydney. The Malindra Group is thelargest 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 Construction of Nowra commences 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 5 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  6. 6. 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.For more details, refer to the Technologies and Markets sectionAlgae.Tec Limited – Arrowhead BID 6 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  7. 7. News– Algae.Tec signs collaboration contract for demonstration plant: On June 30, 2011, the company announced that Malindra is making several contributions to the project, including access to the land and utilities. Stroud said that, Malindra has made their personnel freely available and moreover, through their goodwill, the liaison with local contractors and specialist groups required from time to time during the construction process was facilitated. In turn, Algae.Tec’s role in the project is to build the demonstration plant, and ensure safety and site regulations are met, Stroud continued. Stroud also noted that his company currently 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 Malindra Group’s Nowra ethanol plant, the largest ethanol producer in Australia.– Algae Tec’s depositary Receipts commences trading on the USA OTC market: On April 28, 2011, the company announced its American Depositary Receipts (ADR) debut on the USA OTC market under the ticker ALGXY. The Bank of New York Mellon (BNY Mellon) was appointed to establish and manage the Level 1 American Depositary Receipt (ADR) Program.– Algae.Tec opens Atlanta Algae Development & Manufacturing Centre: On March 17, 2011, the company announced the opening of the Algae Development & Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled for shipping around the world. The Algae Development & Manufacturing Centre is an 18,200 square foot fabrication facility. The company’s executive chairman said that the center is currently being modified to enable retrofitting system process of the 40 feet steel shipping container algae growth modules, ready for the first module delivery to the center in April.– Algae.Tec launches ADR Program: On March 17, 2011, the company announced; it had appointed the Bank of New York Mellon to commence the establishment of a Level 1 American Depositary Receipt program. The Executive chairman, Roger Stroud, said that the ADR program would give the United States energy and investors access to shares of the company, which is in a high growth phase establishing facilities in Australia and Asia.– Algae.Tec lists on Frankfurt Stock Exchange: On February 21, 2011, the company announced that it has been accepted to list on the Frankfurt Stock Exchange (FWB). The Executive chairman, Roger Stroud said that the dual listing on FWB gives the company access to the most significant sustainable energy financial market. He also said that the company has a globally focused growth path so it is important to be part of the world’s biggest investment facility covering the European Union and United States.– Algae.Tec lists on Australian Stock Exchange: On January 13, 2011, the company announced that it has listed on Australian Stock Exchange. On this occasion, the CEO of the company said that Algae.Tec will be the first algae company to list on a main board stock exchange in the world, and one of the few cleantech companies to be listed in Australia.– Algae.Tec targets 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 Limited – Arrowhead BID 7 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  8. 8. – 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 ~9.49 3.82%Fmr Investments Pty Ltd ~5.00 2.01%Moltoni Corporation Pty Ltd ~4.38 1.76%Other holders less than 1% ~30.02 12.06%Source: Bloomberg - 29 Aug 2011Algae.Tec Limited – Arrowhead BID 8 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  9. 9. 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 9 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  10. 10. AlgaeAssets and Projects Products End-Use Markets Biomass Feedstock source for biomassOverview power generation withAlgae.Tec is focused on commercializing Substitution of fossil fuelstechnology that produces algae at a very fast Conversion of residualrate, to manufacture sustainable algae oil biomass following oil(which is further used to produce vegetable oil, extraction to renewablebiodiesel and refined glycerine), biomass (used distillates.to produce animal protein feed, bio-ethanol and Biomass nutrients suitable forrenewable distillates) and other nutrients such use in agricultural fertilizersas fatty acids.The company produces high-yield algae growth Vegetable Oiland harvesting technology through the Microalgae such as higher plants produceMcConchie-Stroud System. The McConchie- storage lipids in the form of triacyglycerols.Stroud System is designed to cultivate algae Comparatively, algae produce more oil than anyvirtually anywhere, including marginal land or other oilseeds which are currently in use. Manyindustrialized areas. The system is designed for microalgae species can be induced toscalability and minimal land footprint and water accumulate substantial quantities of lipids, oftenusage. greater than 60% of their biomass. The table Algae Oil Vegetable Oil Market below presents indicative oil yields from various Biodiesel Biodiesel Market oilseeds and algae. Algae Oil Refined Glycerine Glycerine Market Yields (Gallons of oil per acre per year)v Corn 18 CO2 Animal Nutrients Protein Feed Animal Feed Market Soybeans 48 Algae Ethanol Market Biomass Bio-Ethanol Water Production Safflower 83 Renewable Chemicals Diesel Fuel Market Distillates Sunflower 102 Fatty Acids Fatty Acid Market Rapeseed 127 Oil Palm 635 Algae Micro Algae 5,000-15,000 End-Use Markets Products Depending on the geographic region, the Lipids/Oils Algae oil substitution of 125Mtpa vegetable oil market (primarily, palm, vegetable oil feedstocks (e.g. soybean and rapeseed oils), representing AU$ soybean oil, palm oil) for 110Bis growing between 3% and 5%. biodiesel industry vi Approximately 80% of the vegetable oil Refined glycerine produced demand is for the food market, and consumer via algae-biodiesel production products and feedstock for biodiesel production Specialty oils and fatty acids. account for approximately 25Mtpa of the total Carbohydrates Substitution of agricultural demand. Vegetable oil prices have historically sourced feedstocks for followed agricultural supply/demand balances, conversion of carbohydrates population growth and standard of living; (sugars) to bio-ethanol however, crude oil pricing has also significantly influenced vegetable oil prices. Soybean and Proteins High protein content algae palm oil prices (see chart below) vii have biomass for the animal food escalated approximately 14% per year over the market past five years and the trend continues (current Hydrocarbons Production of renewable vegetable oil prices are AU$1220/T). distillates via gasification for substitution of diesel fuels.Algae.Tec Limited – Arrowhead BID 10 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  11. 11. Palm and Soyabean oil price United States (approximately 15% of the global 1600 market). 1400 Biodiesel is registered and used as a direct diesel fuel substitute and fuel additive, which is 1200 most often marketed in blends of 5% to 20%. 1000 Biodiesel provides important environmental advantages, e.g., carbon dioxide sequestration, US$/MT 800 significantly reduced toxic exhaust emissions, 600 and has the highest “energy balance” of any 400 transportation fuel. There are more than 500 biodiesel manufacturing plants worldwide with a 200 total in-place production capacity of 37B liters 0 per year. The price of biodiesel is primarily driven by the 01 02 03 04 05 06 07 08 09 10 r- r- r- r- r- r- r- r- r- r- Ap Ap Ap Ap Ap Ap Ap Ap Ap Ap following factors: Palm Value Soyabean Value – The crude oil-derived diesel market – The level of government subsidy and,Fatty Acid – The price of biodiesel feedstock.Another very useful form of algae is fatty acid.Fatty acid is a viscous, gum-like substance,derived from algae. It is also a very importantingredient in the manufacturing of papers andtextiles. As it possesses most of the propertiesof gum, it is also used in the water-proofing andfire-proofing industry. It is especially helpful inmaking fabrics that are fire and water resistant.In the pharmaceutical industry, it is used in themanufacture of Gaviscon, Asilone, Bisodol etc. Itis used as a mould-making material in lifecasting, prosthetics and dentistry. Like most ofthe forms or products of algae, alginic acid isused extensively in the food processing industryas an ingredient of soups and jellies.The world production of fatty acids from thehydrolysis of natural fats and oils aggregates toapproximately5Mtpa, which represents anAU$3B per year market. The consumption offatty acids is related to the growth in vegetableoils and economy of the region. The currentfatty acid prices range from 50% to 70% of thevegetable oil prices, which is greater than Sources: Energy Information Administration – U.S.AU$500/T on an average. Department of Energy (EIA-DOE), U.S. Department of Agriculture (USDA) JacobsenBiodiesel GlycerineMost research into efficient algal-oil productionpredicts that biodiesel may be the only viable Glycerine is a by-product in the process ofmethod to produce enough automotive fuel to producing biodiesel for pharmaceutical andreplace current world diesel usage. Current consumer products industries. From every 1 mtbiodiesel consumption represents approximately of biodiesel 0.1 mt of glycerine is produced.1% of the total vehicular diesel fuel demand Crude glycerine (80% content) is typicallyglobally at 12.5B liters per year. Europe is by far upgraded to refined glycerine (99.5 %+) forthe largest biodiesel market (approximately food, pharmaceutical and consumer product80% of the global market), followed by the applications. The worldwide demand forAlgae.Tec Limited – Arrowhead BID 11 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  12. 12. glycerine is over 1 Mtpa and continues to grow Ethanol from algae is produced by convertingat 5% per annum. The current glycerine market starch (the storage component) and celluloseis approximately AU$900MMper year at (the cell wall component). Lipids in algae areAU$750/T. converted into biodiesel, while the carbohydrates are converted to ethanol. AlgaeBiomass are the optimal source for second generationAlgae biomass may be used directly or after oil bio-ethanol due to the fact that they are high inextraction for a number of major applications carbohydrates/polysaccharides and thin cellulosesuch as animal protein feedstock, agricultural walls.fertilizer, biomass power generation, and further The total global bio-ethanol consumption isbiomass conversion to ethanol via fermentation approximately 70B liters (55Mtpa) andor to middle distillates via gasification and represents an AU$35B biofuel market per year.Fischer-Tropsch synthesis. Biomass after Bio-ethanol demand is set to double over theextracting oil contains about 40% to 60% next 20 years. Ethanol prices correlate highlycarbon content dependent on the algae species with ex-rack gasoline with current prices atand operating conditions in the form of AU$650/T.carbohydrates, proteins and hydrocarbons.The animal feed market is a 180Mtpa market(AU$80B per year). The primary source foranimal protein feed in the U.S. is high proteinsoybean meal, currently priced at approximatelyAU$425/T. The residual algae biomass with highcarbohydrate and protein contents offers adirect substitute for agricultural-based proteinsources.EthanolAlgae.Tec Limited – Arrowhead BID 12 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  13. 13. – Blue-Green Algae – They are found inTechnologies and Markets freshwater and marine environment habitats and play an important role in fixing nitrogen from the atmosphere.Algae – Golden Algae – Golden algae primarily existsChemistry and Properties in freshwater systems. They are very similarAlgae is a group of aquatic estuarine and marine to diatoms but have more complex pigmentplant organisms, which may range from systems.microscopic (microalgae) to many meters in Algae as Energy Sourceslength. They range from small single celledorganisms to multi-cellular organism, some with Shooting prices of oil, increase in consumptionfairly complex and differentiated form. Algae is of fossil fuel, advances in technologyusually found in damp places and bodies of development and government’s focus on globalwater and thus are common in terrestrial as well warming have attracted demand for algae as aas aquatic environment. There are more than potentially rich source of sustainable biofuels.30,000 fresh water and salt water species of Algae are very beneficial as a renewable fuelalgae. Approximately 1,000 algae species show resource because of the following advantages:the potential for production of biofuels. – It has one of the most efficient and fastestMicroalgae production cycles, which converts solar energy and carbon dioxide into renewableStudies shows that algae species which are and sustainable fuels.primarily unicellular or diatom microalgae has a – It is an environment friendly source ofpotential of biofuels, meeting the general producing energy. It efficiently sequestersrequirement for algae production. These species atmospheric carbon dioxide, favorablyare useful in producing: 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 streams.– Hydrocarbon compositions suitable for production of renewable distillates. – The production of oil per land mass is greater than any terrestrial crop and can beThese are the most primitive form of plants; cultivated virtually anywhere.however the mechanism of photosynthesis is – Also, the hydrocarbons derived from algaesimilar to that of higher plants. Due to simple production can be used to produce renewablecellular structure and growth in aqueous biofuels for direct substitution of fossil fuels.environment with more efficient access to water,carbon dioxide and nutrients, microalgae are far Global Algae Market Opportunitiesviiimore efficient converters of solar energy. The global market for Algae is poised forBiologists have categorized algae into a variety explosive growth in the next 10 years reachingof classes on the basis of pigmentation, life cycle 61MM gallons per year and a market value ofand basic cellular structure. The most abundant AU$1.3B by 2020, representing a CAGR of 72%,types/families of microalgae include: roughly on par with early development in the– Green Algae – They generally exhibit high biodiesel industry. growth rates and are considered as the Globally, the United States is poised to ramp up evolutionary progenitors of modern plants. production the earliest amongst world markets, Carbohydrates and natural oils (lipids) are with 50% of all algae activity. The European the main storage compounds for green algae. Union (EU) market, accounting for about 30% of– Diatom Algae – Found in oceans, they are algae activity, will be limited initially by the rich in silica in the cell walls and store carbon industry’s focus on university research, and later primarily in the form of natural oils or by insufficient access to water, land, and carbohydrates. nutrient sources. It is believed that United States and Europe cannot grow enough corn,Algae.Tec Limited – Arrowhead BID 13 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  14. 14. soy, or rapeseed to meet there bio-fuel targets. oil-palm trees - currently the largest producer ofLatin America and Asia Pacific, which have fewer oil to make bio-fuels - yield just about 20% ofprojects in operation today, are set to gain their weight in oil.significant market share in the long run. TechnologyUltimately, algae potential is greatest in regions The company uses McConchie-Stroud technologywhere there is an abundance of land, water, and system to produce algae-based biofuel.sunlight. Secondary considerations include Currently, the company is pursuing thefavorable regulations around biofuels mandates, commercialization of this technology for algaegreenhouse gas (GHG) emissions, wastewater production and processing system.treatment, and livestock operation, as well aspotential co-location opportunities (wastewater Algae are micro organisms that containremediation and carbon recycling). Algae is chlorophyll, and with water, carbon dioxide andbecoming one of the most promising sources of sunlight they produce complex carbon chainbiodiesel as it is biodegradable and can be molecules such as hydrocarbons andproduced using ocean and waste water without polysaccharides and proteins. The compositiondepleting fresh water resources. of algae product is dependent on the specific species utilized and the photo-synthesisThe industry believes that the algae-based operating conditions employed. Algae productsbiofuels market will be characterized by regional contain 45%-80% of carbon content in the formcollaborations and partnerships that are able to of lipids/oils, carbohydrates, proteins andcapitalize on efficiencies through expertise hydrocarbons.related to unique environmental conditions, co-location opportunities, and access to end Algae Productionmarkets. This horizontal organization will result Algae production comprises a series of criticalin significant consolidation within the market processing steps, including supply systems forover the next decade. carbon dioxide, light energy and nutrients,Algae are attracting increased investments and harvesting of biomass and refinement of algaeinterests from bio-fuel, petroleum and products.agribusiness industries. Driven by escalating The company developed and utilized processglobal climate change concerns and the rising simulation models for evaluation of the algaecost of petroleum-based energy, companies and process and its downstream bio-fuels, includinggovernment entities are developing the use of detailed material and energy balances, processbio-fuels derived from algae to reduce carbon flow diagrams, unit and equipment design andemissions from power plants and generate specifications, plant lay-out and turnkey capitalrenewable transportation fuels. estimates. Based on the development phaseUsing an intricate process of photosynthetic, results, engineering design and processcompanies have developed biodiesel and ethanol simulation modeling, material and energyfrom algae that, given optimal conditions, can balance data are presented in the process flowdouble its volume overnight. Up to 50% of an diagram for a typical algae plant.algas body weight is comprised of oil, whereasAlgae.Tec Limited – Arrowhead BID 14 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  15. 15. 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 from fossil fuel power Stackgas Pre-Treatment plants, biomass etc. Water RecycleGas Treatment Preparation of stackgas for photo-reactors, Gas Distribution Network including water removal, temperature control, Recovery of Module Off-Gas compression and gas distribution. Solar CollectionLight Energy Solar energy in the form of visible light Visible Light Filtration & DistributionSupply absorbs and converts CO2 to produce algae. Energy Recovery/Storage Water Supply (fresh, marine and/or Preparation units for water supply, nutrient wastewater)Raw Material package, alkalinity control and make-up algae. Alkalinity ControlSystems Nutrients, Nitrogen and Phosphorus are Nutrient Preparation Unit formulated via addition of industrial fertilizers. Make-up Algae Control System Modular Photo-Reactors Photosynthesis bio-reactor system controls the Internal Light Distribution NetworkModular Photo- overall productivity and desired product yields per ModuleReactors per species. Modular Infrastructure & Process Controls per Module SeriesAlgae.Tec Limited – Arrowhead BID 15 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  16. 16. Process Steps Process Description Key Unit Operations Low concentration of micro-algae in final output requires various algae separation Combinations of Flocculation, Gas- measures. Lift Frothing & Paste HandlingHarvesting Recovery methods for algal cell fracturing and Mechanical Separation Units direct recovery of hydrocarbon products Algae Biomass Refinement provide improved overall energy efficiencies. Algae biomass contains predominantly lipids (fats/oils) and carbohydrates Conventional oil extraction technologies Oil Extraction Units (mechanical expeller and/or solvent Crude Algae Oil TreatmentProduct extraction) are employed to recover crudeRefinement Fatty Acid Co-Product Recovery algae oil. Chemical treatment and refinement is required Biomass Product Refinement for purification of the finished algae oil product. Biodiesel & Glycerine via Oil Transesterification Algae oil acts as raw material for biodiesel Biomass Animal Food ProductsDownstream (and glycerine). Ethanol ProductionProducts Biomass is a source of animal feed, ethanol and other energy sources. Middle Distillates Production Power Generation via Biomass GasificationAlgae.Tec Limited – Arrowhead BID 16 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  17. 17. 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 Malindra-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 extensive ly 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 17 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  18. 18. Financing Risk - LOWProject 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. TheWe identified the risk as “Medium” on a company will be required to raise additional fundscomparative basis and assigned a score of “1.8” in the future and faces the risk of obtaining it onbased on the risk profile of the major projects terms which are favorable to the company.pursued by the company as well as its peers. The Additionally, the funds are not sufficient to enableimportant risk categories considered for the study the company to fully commercialize theinclude: McConchie–Stroud System.– Project Stage Risk: Medium - Near feasibility Any additional equity financing will dilute– Intellectual Property Risk: Medium – Yet to be shareholders interest, and debt financing, if patented available, may involve restrictions on financing and operating activities. If the company is not– Financing Risk: Low – Successfully publically able to obtain additional financing, it may be issued its shares required to reduce its scope of operations and scale back its expansion and development– Operational Risk: Medium – dependent on programs. technology used Success of the McConchie-Stroud System -The Risk Profile has been assessed as a weighted HIGHblended score based on the project stage risk(30% weight), intellectual property risk (30%), The company is relying on the success of itsfinancing risk (20%), and operational risk (20%). McConchie-Stroud system and believes that it will be able to develop and commercialize the systemThe individual risk parameters and the underlying in the near future. Though the company hasrationale for the scores are discussed in the shown excellent results during its research andsubsequent sections. development phase, it still faces the risk ofPeer Risk Profile commercialization of algae products from the McConchie-Stroud system. Total Project Intellectual Financing OperationalTicker Risk Stage Property Key Personnel - MEDIUM Risk Risk Score Risk RiskAEB 1.8 2 2 1 2 The company faces the risk of losing its two keyPALG 1.4 1 1 2 2 directors, Messrs McConchie and Stroud, who developed the McConchie-Stroud system. WhileSZYM 1.2 1 1 1 2 these directors are the major shareholders in theIntellectual Property Risk - MEDIUM company, non involvement of either of them will adversely hamper the company’s future plans.The company has not obtained a patent inrelation to the McConchie-Stroud System so far. Operational Risks- LOWThere is no surety that the current patent The company’s demonstration and commercialapplication in Australia for the McConchie-Stroud plants proposed by the company may be affectedwill be granted, or that any other patent by various factors, including failure to locate aapplications that may be lodged in relation to the suitable location, failure to achieve predictedMcConchie–Stroud system will be granted. yields of algae and algae products, operationalThere is always a risk of a third party bringing a and technical difficulties encountered in scaling upclaim in relation to any aspect of the property. the McConchie–Stroud system to commercialAny dispute will adversely affect the company. production level. The company also faces the riskHowever, the company has taken reasonable of unanticipated bioreactor problems which maysteps to protect the ownership of the intellectual affect the production cost.property related to the McConchie-Stroud and Apart from the above risks, the company facesbelieves that there is no third-party interest. the risk of adverse weather conditions, industrialAlgae.Tec Limited – Arrowhead BID 18 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  19. 19. and environmental accidents, currency risk and fuel produce along with Siemens and theindustrial disputes. University of Utah. Solazyme Inc.Peer Profile The San Francisco-based, Solazyme Inc., growsPetroalgae Inc. algae with sugars in closed fermentation tanks toPetroalgae Inc. is a Melbourne-based algae create oils, which can be used for liquid fuel andproduction firm that has lemna as its main for chemicals, foods, or personal care products.output. It is easier, at present, to grow, harvest Solazyme proprietary microalgae areand dewater lemna than the unicellular algae heterotrophic, meaning they grow in the dark (inharvested by Algae.Tec. Lemna shares with fermenters) by consuming sugars derived frommicroalgae, a rapid growing rate and ability to plants that have already harnessed the sunsgenerate large amounts of usable biomass on energy. By using standard industrial fermentationnon-productive land. equipment, theyre able to efficiently scale up and accelerate microalgaes natural oil production timeThe company is planning to optimize the growth to just a few days and to commercial levels.of indigenous micro-crops with open tanks atcommercial scale through the management of The companys strategy has been to make oils forlight exposure and other elements of the specific personal care and nutritional marketsenvironment. The technology monitors variable before taking on liquid fuels where there isparameters, including light, temperature, density margin pressure and brands play a major role. Itand nutrition, to determine the optimal point in has customers for food and personal care and wasthe growth cycle at which the biomass should be awarded a Department of Energy grant to makeharvested. fuel for use by the Navy, which successfully tested a 50-50 blend of petroleum and algae oil.The company plans to generate licensing fees and Solazyme has development arrangements withroyalties from customer licensees in the global airlines Qantas, Chevron Technology Ventures,energy and agriculture markets. They would and with chemical company Dow.consider entering into alternative arrangements inwhich license fees and royalties would be reduced Solazyme signed an agreement with Bunge forin place of a greater share of the operation’s commercial renewable oil plant in Brazil. This JVprofits, but with no direct exposure to capital planning to build 100,000 mt renewable oilrequirements. production facility located at Bunge owned sugar cane mill in Brazil.The company has two hector demonstrationfacilities in Florida, while it has done testing of itsAlgae.Tec Limited – Arrowhead BID 19 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  20. 20. 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 20 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  21. 21. 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 when compared to its peers. It is currently building a demo plant whereas Petroalgae has an operational demo plant and Solazyme has a fully commercial plant in place. IPO in April Demo Plant with Building aAlgae.Tec AEB 2011 for 81.81 87.31 Algae.Tec’s demo plant is Malindra demo plant AU$20c made along with Malindra, the largest Ethanol producer in Australia. Algae.Tec has also received recognition from aviation industry for its fuel demo plant with Malindra. 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 1,176 1,240 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 750.6 504.7 which has a functional Joint – 50:50 Renewable between the commercial plant supplying chemicals project fuel to US Navy. Nutrition products partners Skincare Products Algae.Tec Limited – Arrowhead BID 21 OTCBB:ALGXY; ASX:AEB Due Diligence and Valuation Report See important disclosures on page 26 of this report.
  22. 22. 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 22 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  23. 23. 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 63,839 106,195 149,205 192,999 237,589Total Non-Current Assets 29,815 55,633 52,574 49,682 46,949 44,367 41,927TOTAL ASSETS 33,556 75,430 116,412 155,877 196,154 237,367 279,516Total 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 23 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.
  24. 24. analysis (one to twelve months). The reader should refer to important disclosures on page 26 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 ~130 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 Malindra 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 Malindra - Algae.Tec Demo Plant before 2021.Algae.Tec Limited – Arrowhead BID 24 OTCBB:ALGXY; ASX:AEBDue Diligence and Valuation Report See important disclosures on page 26 of this report.

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