Independent Report A Positive For Algae.Tec
- Algae.Tec has established its US assembly centre - The company will shortly list in ADR form in the US - An independent report values AEB shares at $1.62-2.47
By Greg Peel
If you are unfamiliar with Algae.Tec please refer to An Opportunity To Enter The Biofuel Revolution At The Base Level.
Is alternative energy back in the frame again? The Japanese nuclear disaster has certainly re-awoken the world to the possibilities. Natural gas has received quite a boost in interest as the energy of choice were nuclear's star now to fade, and as an obvious alternative to crude oil in a world where oil prices are pushing ever higher. But alongside LNG, energy sources in the “green” space have also come back into favour after having wallowed recently in the wake of Copenhagen and various on again-off again attempts in the likes of Australia and the US to put a price on carbon.
Biofuel company Algae.Tec ((AEB)) exploits patented modular technology to convert captured CO2 and solar energy into everything from diesel to jet fuel and fertilisers via algae growth. AEB listed on the ASX in January to raise funds for a pilot plant being currently developed near Nowra, NSW, in association with an ethanol facility.
AEB has since been accepted to list on the Frankfurt Stock Exchange to provide exposure to investors in the world's most popular alternative energy market in Germany and will shortly list in the US in the form of American Depository Receipts (ADR) sponsored by bank of New York Mellon. The company has recently opened its Algae Development & Manufacturing Center in Atlanta, Georgia, at which the modular photo-bioreactors will be assembled for shipment to Australia and, in time, the world.
AEB has also commissioned an independent Due Diligence & Valuation Report from New York based consultant Arrowhead Business and Investment Decisions.
“The global market for algae,” suggests Arrowhead, “is poised for explosive growth in the next 10 years reaching 61 million gallons per year and a market value of A$1.3bn by 2020 representing a compound annual growth rate of 72%, roughly on par with early development in the biodiesel industry. Globally, the US is poised to ramp up production the earliest among world markets with 50% of all algae activity.
“The EU market, accounting for about 30% of algae activity, will be limited initially by the industry’s focus on university research, and later by insufficient access to water, land, and nutrient sources. It is believed that US and EU cannot grow enough corn, soy, or rapeseed to meet their bio-fuel targets. Latin America and Asia Pacific, which have fewer projects in operation today, are set to gain significant market share in the long run.
“Arrowhead believes that Algae.Tec has vast growth potential with a low risk profile. Based on intrinsic revenue capacity from 500 modules and excluding further projects, Arrowhead believes that the company’s fair share value lies in the A$1.62 to A$2.47 bracket.”
As AEB is still in the process of building its initial demonstration (albeit commercial) plant, any valuation placed on the stock is working off assumptions and projections which have no track record to anchor them. Nevertheless, for a stock currently trading at 40c a $2.00 valuation is an eye opener. Algae.Tec Chairman Roger Stroud specifically notes that the Nowra plant will deploy 250 modules with another plant of similar size being currently planned in China. Eventual commercial plants will be a good deal bigger than 250 modules, meaning Arrowhead's numbers based off 500 modules only are very conservative.
As suggested in the original AEB prospectus, one module (converted shipping container) can produce 250t of dry algal matter per annum. Market prices for vegetable oil exceed US$1,000/t, and for biomass of similar chemistry exceed US$400/t, which would result in an estimated US$700m revenue per tonne or US$175,000 per year per module.
Operating costs are estimated to be US$185/t of production. Based on a minimum of 200 modules, capital costs, including all ancillary, harvesting and separation equipment, are estimated to be US$50/t based on a 10 year module life. Quick maths: US$465 of profit per tonne.
Noting that the commercial application of algae technology is a first for the world at this juncture, readers are reminded that Algae.Tec represents a risk investment for potentially high, but not guaranteed, reward. Note also that funds raised from the IPO are sufficient only to cover the cost of the demonstration plant and further capital will be required to move the company to a fully commercial level, which may include further capital raising. AEB's market cap is currently in the order of A$100m.
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