aae value of swan hill ethanol

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Attention ASX Company Announcements Platform
Lodgement of Open Briefing®
Australian Ethanol Limited
Suite 4, Level 1
11 Ventnor Avenue
West Perth, WA 6005
Date of lodgement: 09-Jun-2006
Title: Open Briefing®. Australian Ethanol. Value of Swan Hill Ethanol
Record of interview:
corporatefile.com.au
Australian Ethanol Limited (ASX code – AAE) recently explained the value of its
Beatrice Biodiesel Project in an Open Briefing®. AAE also recently announced
that it is proceeding with its Swan Hill Ethanol Project. The Australian
Government and major Australian oil companies have not encouraged the
development of an Australian ethanol industry in the same way as the US industry
has been encouraged. Within that framework, why have you decided to go ahead
with an Australian ethanol project?
CEO Peter Anderton
The opportunity to develop fuel ethanol projects in Australia is substantial.
Australia currently consumes less than 40 million litres of fuel ethanol in blended
fuels annually, which is only about 0.02% of the total petrol consumption. Other
countries such as Brazil, India, Thailand and parts of Europe are significantly
higher. The United States are currently at 3.2% with a Presidential mandate for
this to increase to 5% by 2010. The Australian Fuel Ethanol industry is
substantially behind the rapid growth in fuel ethanol consumption that has
occurred in the rest of the world and we anticipate that Australia will be quick to
grow its ethanol production and catch up over the next few years. AAE intends to
be at the forefront of this growth and development.
AAE recently completed a share placement of AUD$12.45 million which has
resulted in a number of major Australian and offshore funds and institutions
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investing in the Company. This is based on our Australian biofuels strategy. The
strong indication from these investors is that they will support our Australian
ethanol projects in the future.
corporatefile.com.au
Can you give an indication of the earnings you expect from the Swan Hill Ethanol
Project? What are the combined earnings from both the Beatrice and Swan Hill
projects?
CEO Peter Anderton
We estimate that the cash operating cost of producing ethanol from the Swan Hill
plant is around A$0.50 per litre. If we assume a terminal gate price of A$1.20 per
litre (today over A$1.30 per litre) and a A$0.20 per litre ethanol delivered to the
terminal, the Project revenues should be around A$100 million with EBITDA of
around $30 million per annum.
At full production, the combined EBITDA from Beatrice and Swan Hill is
estimated at A$120 million.
We’ve identified six other locations in Australia to develop ethanol and future colocate
biodiesel facilities and we’re also looking for further biofuels investment
opportunities in the US and elsewhere.
corporatefile.com.au
What’s the status of the Project? Can you talk specifically about the engineering
and process design contracts? Are you able to attract the appropriate workforce?
CEO Peter Anderton
The Swan Hill Ethanol Project is moving forward very positively. Our technology
provider and engineer, Praj Industries Limited of Pune, India, are currently
completing the detailed engineering for the Project. The majority of that work
should be completed over the next 2-3 months although the final detailed and
completed design is not scheduled until October this year. It’s our intention to
order the long-lead items during the next 4-6 weeks. We’re in the process of
completing the land acquisition contracts by exercising the options which have
previously been put in place. Our site engineer will commence work in the middle
of June, with his initial objectives to complete the roads, other site works and the
installation of all utilities. The funds for this work were committed by the AAE
board in April this year.
corporatefile.com.au
What is the size of the Project and the current capital cost for Swan Hill? How
might you contain capital costs?
CEO Peter Anderton
The plant will have a design capacity of approximately 100 million litres per
annum of fuel ethanol based on a multi-grain feedstock and will cost about A$65
million. We’ve recently agreed to buy back the construction rights from
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Multiplex. They no longer have any rights to construct our projects in Australia.
The Company intends to establish a joint venture with a local company to manage
and construct the Project. Effectively that means we will take joint construction
risk on the Project. This, together with a fixed cost agreement with Praj and other
discipline subcontractors, will be the key to containing and managing the cost of
the Project.
Praj is the world’s leading supplier of ethanol technology and has built some 300
plants around the world. Praj has guaranteed the plant’s operating performance,
yield and the quality of the output.
corporatefile.com.au
How do you plan to fund the total Swan Hill Ethanol Project and when do you
expect commissioning?
CEO Peter Anderton
We are well advanced towards raising additional capital which will be used to
finance the development of the Swan Hill plant. The Swan Hill plant is expected to
be commissioned by the fourth quarter of calendar year 2007.
corporatefile.com.au
Can you explain why you’re proceeding with the Project when you haven’t yet
signed fuel ethanol off take contracts? Can you outline the contracts you have in
place covering the raw material inputs?
CEO Peter Anderton
At this stage, the Australian Ethanol industry has been unable to put in place off
take contracts to support the development of new fuel ethanol projects in Australia
and that is the principle pre-condition of a debt financing package. However, we
have been encouraged by our shareholders to proceed with the Project on an equity
basis. Our equity placement in March resulted in major changes on our share
register and over 70% of our shares are now held by large Australian and offshore
institutions.
We’re currently in discussion with all of the major oil companies and believe that
the situation regarding off take contracts will most likely change substantially in
the near future. I attended a round table ethanol industry meeting last week which
was hosted by the Minister for Industry, Tourism and Resources, Ian Macfarlane,
and attended by all the major oil companies and other industry participants.
There’s no doubt that the oil companies intend to provide ethanol blended fuels at
an increasing quantity and number of outlets across Australia.
We expect the oil companies to move towards supply agreements once
construction is underway and we have demonstrated our commitment that ethanol
will be available in quantities and to the specification that they require for
blending. There is a strong regional demand for ethanol blended fuels which is
capable of considerably lowering the gap in petrol prices between regional and
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metropolitan markets. Regional fuel distributors are capable of blending ethanol
with petrol as are the major oil companies.
The Swan Hill plant will require about 300,000 tonnes per annum of feedstock. As
the plant has been designed as a multi-grain facility to provide maximum
flexibility in sourcing feedstock, the plan is to use barley, wheat and corn to
balance the seasonal growing patterns of these crops. Currently, about one-third of
the required input has been locked in through supply agreements which are
structured on a fixed price delivery of grain. The Company does not envisage any
problems in securing all its requirements as it has actively encouraged the growing
of corn in irrigated areas north of Swan Hill for the purpose of supplying the plant
and as our requirement for barley and wheat is less than 20% of production in the
area from which we are sourcing feedstock.
The Company has put in place sale agreements for all distiller’s grain and syrup
output, the by-products of the ethanol production process. Distiller’s grain is
highly valued by the feedlot industry due to the high concentration of protein.
This will provide 15-20% of the total Project revenues.
corporatefile.com.au
Could you talk some more about the difference in dynamics of the Australian and
US ethanol markets and explain what is happening to give you confidence that
conditions in the local market are becoming favourable for the Swan Hill Ethanol
Project?
CEO Peter Anderton
The US ethanol industry is undergoing enormous growth. Production in the US
has doubled to over 4 billion gallons per annum since 2003 and is expected to
reach 7.5 billion gallons in 2012 under the Federal Government’s Energy Policy
Act 2005. At this level, ethanol production will be equivalent to more than 5% of
gasoline production. The ethanol industry in the US enjoys considerable
government support at Federal, state and regional levels. The industry is
integrated into the agricultural production chain and is a major user of corn with
many of the ethanol plants owned by grower groups.
In Australia, on the other hand, governments have been quite cold and have
demonstrated limited commitment to biofuels in general, notwithstanding some
favourable excise treatment. But, the time is now right for the development of an
ethanol industry in Australia. Feedstock is available and oil prices are significantly
ahead of where they need to be for ethanol to be viable. For energy users, lower
cost ethanol will help to reduce fuel prices. Then there are the environmental,
energy security and octane enhancement arguments to further support
development.
What is missing in Australia are the links with the agricultural sector that are well
established in the US. Australian Ethanol is developing considerable competitive
advantages by developing links locally.
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corporatefile.com.au
What incentives would you like to see in place for the industry to grow in
Australia? Do you expect any incentives to be put in place in the foreseeable
future?
CEO Peter Anderton
The major incentive for fuel ethanol use in Australia is the 38.143 cent per litre
excise relief. The excise is legislated until the middle of 2011 when there will be a
staged reduction in the excise support to 12.5 cents per litre by 2016. At this point
the industry would still have a 25.5 cent per litre buffer against fossil fuels.
It’s our understanding that the Federal Government will not be introducing a
mandate for blended ethanol in petrol. This is a philosophical issue with the
current Government and is quite a different stance from governments in the US
and Brazil. Almost all developing countries in the world are seeing significant
growth in renewable fuels and in particular the use of biofuels in transport fuels.
Australia is well out of step with other countries in that ethanol currently accounts
for less than 0.02% of its total petrol pool. The figure is 23% in Brazil and about
3.2% in the US. In effect, Australia is consuming less ethanol blended fuel than
we were three years ago. It’s our view that Australia will not continue to fall
behind other countries, that will allow for massive growth in fuel ethanol
consumption in Australia once the industry gains a foothold. There is so little
ethanol supply in Australia because no new ethanol facilities have been built in
approximately the last 20 years. We expect massive growth once the first plant is
developed and operational.
Another important driver for the fuel ethanol industry is the oxygenate
requirement which, as the cleaner fuel legislation takes further effect, will
inevitably see the major fuel companies turning to ethanol as their principle source
of octane enhancement.
corporatefile.com.au
You are now very upbeat about AAE’s future. Can you sum up the current growth
strategy and why you believe you can execute it?
CEO Peter Anderton
We’ve made considerable progress over the past few months in both raising capital
and adding human resources to the organization. Although we’re still in
development mode, the Company is undergoing a transformation which will
accelerate as we head towards production. It is an exciting time as we watch our
vision move towards implementation.
In simple terms, our strategy is to build a major ethanol production facility at
Swan Hill based on equity and a 50 million gallon biodiesel facility at Beatrice,
Nebraska based on substantial debt. This will allow a sensible balanced capital
structure. As I said earlier, we’re currently seeking to put in place development
approvals and environmental licences for six other locations in Australia to
develop ethanol facilities and co-locate with biodiesel facilities.
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We are confident of success because the time is right, we have sourced worldleading
technologies and we are putting in place the best people with appropriate
skills and experience to execute the strategies and run the operations.
corporatefile.com.au
Thank you Peter.
For further information on Australian Ethanol Limited please visit
www.australianethanol.com.au or contact Peter Anderton on +618 9322 9110
To read previous Australian Ethanol Limited Open Briefings, or to receive future Open
Briefings by email, please visit www.corporatefile.com.au
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