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Algae.Tec Powers Up

Small Caps | Jul 02 2013

This story features WORLEY LIMITED. For more info SHARE ANALYSIS: WOR

AEB signs NSW government deal
– Captured carbon will produce biodiesel from coal burning
– Significant expansion planned

By Greg Peel

Algae.Tec ((AEB)) uses proprietary technology to grow algae in scalable modules fed by CO2 emissions and solar power. The resultant end-product is a clean biofuel, achieving a win-win of carbon capture and clean energy production. To learn more about the company see: Algae.Tec Reaches A Milestone.

A year ago Algae.Tec switched on its first operating system at a one-module demonstration plant attached to the Manildra ethanol production facility in Nowra, NSW. The plant was officially opened by the NSW Minister for Resources & Energy. Prior to the demonstration plant’s ramp-up the company has signed memoranda of understanding with German airline Lufthansa, a world leader in the shift towards aviation biofuel, global cement giant Holcim, with the intention of building a larger test facility in Sri Lanka, and China’s Shandong Kerui Group, to build an initial 250-module facility.

Today Algae.Tec has announced its first committed commercial deal, with the NSW government-owned Macquarie Generation, the largest coal-fired power generation group in Australia and one of the largest in the world, producing some 5 gigawatts of power and subsequently 20 million tonnes of CO2 per annum. The deal sees Algae.Tec building an initial 400-module facility alongside MacGen’s largest power plant, the Bayswater plant near Muswellbrook in the upper Hunter Valley.

Bayswater is MacGen’s centrepiece plant, consuming 7.5 million tonnes of coal per year to deliver electricity to Australia’s east coast. The initial algae facility will capture 270kt of CO2 to produce 50t of biofuel per annum, in the form of biodiesel and grade A jet fuel. Bayswater will provide the land, the water and the power for the facility, complemented by solar power. Algae.Tec will supply the algae production modules at an expected cost for the initial 400 of $140m. The company expects to recoup costs within 3-4 years.

The plan thereafter is to increase the size of the facility to 2000 modules, with a goal of reaching 20,000 modules by 2020. For initial funding the company is currently anticipating a US bond issue and does not expect to require further equity raising at this stage. Assisting the funding requirement is a 45 cents in the dollar tax rebate from the federal government on profits from biofuel production. The NSW Energy Minister, Chris Hartcher, today announced the deal, and the company is also hopeful of additional state government funding support.

The deal is a win for the state government on several fronts. Carbon is now MacGen’s single largest cost, and its capture will reduce the group’s carbon bill and improve its bottom line. Petroleum refining capacity is declining in NSW following Caltex’s decision to shift towards fuel imports, and the biofuel produced at Bayswater can feed immediately into fuel demand from the industry-heavy Hunter region. The region has also seen the loss of many jobs over past years, and the Algae.Tec plant will create around 60 new jobs initially, rising into the hundreds as expansion plans are implemented. Finally, the NSW government has an opportunity to revive its “green” credentials.

Algae.Tec has engaged energy services specialist WorleyParsons ((WOR)) as contractor for construction of the facility. Funding is expected to be secured within six to nine months at which point the requisite pre-feasibility study will be completed and permits secured. Construction is expected to be completed by the June quarter 2014 with first biofuel production anticipated by end-2014.

Algae.Tec listed in 2011 on a 20cps offer price and peaked at over 60c in early 2012 on positive newsflow. As is the fate of many innovative start-ups, early price jumps provided attractive exit levels for seed investors and initial newsflow gave way to quiet periods as new deals, such as Bayswater, underwent negotiations, leading to waning investor interest. The shares have since drifted back to 20c.

For Algae.Tec executive chairman Roger Stroud, a 20c share price offers a valuable option over the potentially substantial growth on offer from a carbon capture/alternative fuels production industry in its infancy. The Bayswater deal is testament to the NSW government’s commitment, Stroud suggests, and in an interview with FNArena Stroud drew upon recent commitments made by President Obama to reduce US coal consumption and carbon emissions.

As a micro-cap at this stage, AEB does not draw the attention of Australia’s leading stockbrokers.

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