The great cost of cleaning the world's water
Alan Kohler speaks with Laurence Freedman, Chairman of Phoslock Environmental Technologies, about whether the water company can continue on its growth trajectory.
Alan Kohler here, and today's CEO is not a CEO. It's a Chairman, Laurence Freedman, the Chairman of Phoslock Environmental Technologies, PET. It uses a technology that was invented by CSIRO. They bought it off CSIRO, I think about 10 years ago, and Laurence has been involved since, oh for about five or six years. He is now the largest shareholder with 16%, though he's the chairman.
The product they make is called Phoslock and it removes phosphorus from lakes and other water bodies, which is the stuff that blue-green algae feeds on, so it starves the blue-green algae and basically it gets rid of it, so it cleans up lakes and water bodies. The stock has gone from 40 cents to $1.40 in the last couple of months, because institutions are starting to get involved and starting to look at it. So it's taken off recently. It's now capitalised at close to $800 million.
I think the impression you'll get from Laurence is that this is just beginning. They have only just started to tap the market in this stuff, because basically it's all about China or largely about China. They made $8 million cash revenue in the most recent quarter, the June quarter, and 70% of that came from China. They've got a Chinese government associated company as the second-largest shareholder. So they've got good connections in China, and there's a huge number of lakes and canals and water bodies that need to be cleaned up in China.
But they're also looking in the US and Brazil and also Germany and London where they’re cleaning up lakes as well. Look, it's a fascinating opportunity, a really interesting business. No debt, cash positive, making money. They have got $20 million in the bank, I think. They're looking great. And Laurence Friedman is an Australian billionaire. He made his first lot of money in an investment manager called EquitiLink, which he sold, and then he made some money from Channel 10, which he bought with Izzy Asper of Canada. Now he's just investing his money and focusing a fair bit on Phoslock Environmental Technology. So here he is, Laurence Freedman, the chairman of Phoslock Environmental Technologies.
Well Laurence, obviously the name of the company, Phoslock Environmental Technologies is the same, is named after the product Phoslock. Perhaps we had better start with an explanation of what Phoslock is.
Well, Phoslock is a unique product, in that virtually every water body on the planet is now contaminated by predominantly phosphorus. Comes about by irrigation, by fertilisers, by ducks in the water, by discharges from all sorts of factories, and other products being dumped into water bodies. As a result, phosphorus builds up and is taken as a food substance by blue-green algae, blue-green algae then take all the oxygen, kill the fish, kill the plants, and lakes and water bodies become eutrofied. In other words, no life.
This is a huge and growing problem around the world, particularly with global warming and reluctance by governments to actually do something about preventing inflows. Phoslock is a unique product in that it's very simply applied. It's just thrown onto the water as a dust, a powder. It drops down through the water and as it does so, it locks up any loose phosphorus molecule. Goes down to the bottom as an inert mud, holds it permanently, as no more phosphorous in the water, and it kills the algae by starvation. So it's not an algaecide. You can throw chlorine into water, you can throw alum, you can do all sorts of things, but this is totally harmless to fish and plant life.
So what do you mean that it locks up phosphorus? What does that mean?
It's a molecule. What happens is it's a manufactured product made up of two products. One is a rare earth, tantalum, and the other is a clay. And the, we combine the two and that creates a molecule with, if you like, hooks on it. And those hooks, when you put them into water, that molecule will use those hooks to permanently grab any phosphorus molecule in the water. Of course, it's much more complicated than that. There's water chemistry, there's dosage, there's time of the year, there's amount of phosphorus coming in, fertilisers, et cetera. So it's a complex chemistry, but a simple product and it works. It's virtually the only thing that does work.
Was it invented by CSIRO?
Yes. We bought it off CSIRO about 10 years ago, and in exchange for some shares in our tiny little company, and they had invented it, didn't know how to commercialise it. We saw it as an opportunity and did a deal with them, which they were happy with and we were happy with.
But when you say we, were you involved with the company back then?
Not back then, but I was aware of it and I watched it closely and then started to buy shares in, about eight years ago.
Does the CSIRO still own shares, or did they sell out?
No, they sold out, not their area. They sold out fairly early on. They were happy and we were happy to own it fully.
That was a bit of a mistake.
Well, you know, I, there were times when I thought that it wasn't a mistake because we struggled. Let me explain. Our customers are usually government bodies, semi-governmental bodies, local authorities, local councils. One advantage of that is that we have no bad debts whatsoever because all of our deals are virtually done with government, semi-government bodies. However, the negative of that is that they are not really attuned to fixing things. They're attuned to maintaining what is there.
So if they have a lake that's eutrified or partially eutrified, and it's in trouble, all that they want to do is to make sure that it doesn't get any worse. Now it's taken quite a long time for them to accept that Phoslock doesn't do any damage. And the way that I went about that when I came on board was to give samples to universities, to research people, around the world and got them to study how Phoslock works. We have a number of PhDs now and a lot of universities have written, probably be 200 papers around the world, and I use that as the means of selling the confidence to these government authorities. And that's what turned the story around in the last four years.
Well, I'm possibly jumping ahead here, but you've got a breakthrough in China. How important does that, how did that happen and how big a deal is that?
Well, when I joined the board, which is now what, five or six years ago, the first thing I did was get out of China because we were just giving away free samples to people who wanted to just try it out for three years or four years, and we weren't getting anywhere. So we had a little factory in China that was pumping out a little bit of Phoslock, and we went to the States, we went to Europe, we went to Canada and we went to, funnily enough Brazil, where there was a major lake and we'd been approached on that.
So we left China, went to countries where people would actually do commercial business with you, and we slowly and steadily built the business around the world. And when Xi Jinping came into power, which would be five years ago, four years ago, we said, he said, amongst other things, that we've been getting rich for the last 25 years. Now we've got to clean the place up. And they allocated huge amounts of money to the air, the land and the water. And that's when we went into China and found a super partnership with a company called BHZQ, which is probably the second largest water and environmental remediation company in China, probably worth about...
It's in fact, it's owned by the Beijing Municipal Council, isn't it?
Well, no, it is partly, but more importantly, it's actually has a shareholding indirectly by the Chinese government, the Beijing government. And in China, when you do business, you can have the best name in the world. If you don't have the right connections, well you’ll sell product, but you won't sell huge amounts of product, or you won't get the benefits of the, shall we say, the tick of approval from the Beijing government unless they have some sort of an indirect or a direct interest in it, in your company. And through BHZQ we have, when we signed the deal with them, we had the, we established that connection.
You're starting to make some money now. Obviously, you've made over $8 million in cash receipts from customers. How much of that is coming from China now, and how much from the rest of the world?
Well, at this stage, probably 70% is coming from China, and China is growing, not just exponentially, but it's exploding. The Chinese government's allocation for this remediation annually is twice the total GDP of Australia and it's growing. We are in the process of establishing a number of different projects in China, we've done three or four. The size of these projects are quite enormous. In Kunming, which is in the southwest, there are nine lakes, which we have started the first one, which is the size of Sydney Harbour. There's another eight to come, two of which are probably four to five to six times bigger than Sydney Harbour. So that gives you an idea of the scale.
Though, and the way they're going about it is outstanding, in that we started the tests with the lake, it was getting us $1 million a month, which was fine. And they said yes it works. We are happy with this. Now what we're doing is we are going to prevent any phosphorus coming into this lake from the whole water catchment area. So we've gone from 38 square kilometres lake, to about a 370 square kilometre water catchment area. Now that's not all water obviously, but there's something like 14 rivers and numerous canals and reservoirs. And so we're treating those. So we've scaled up the first project by a factor of probably 10 fold and there's another eight to come just in that one area of one country.
How much do you sell this stuff for, and what's your margin?
The margin is 50% roughly, and we sell it for, can't actually tell you the amount we sell it for, because it varies in various areas, but our gross profit margin...
What's the range?
Or it's about $3,000 a tonne on average. Our margin, which is more important, is around 50%. So, it's a cheap product to actually manufacture. We have tantalum, which is the rare earth, and bentonite, which is a clay. Bentonite is readily available in huge quantities. It's a clay that's found all over the world, but we source it in China. And the rare earth, the tantalum, we use the dregs of tantalum in that it's used for batteries, but battery use is about 93% purity. Ours, we only need about 3% purity. So, we don't have any problems with either achieving tonnages that we need or price for all our products.
Why don't the Chinese just steal your formula rather than buy it off you for 50% margin?
It's a question that everybody asks and it's a real concern in the west. In fact, China belongs to the World Trade Organisation. We have patents around the world. We have a partnership with one of the largest corporations in the country. We have two directors who are substantial shareholders in the company and they are involved... One of them is a director of BHZQ and ultimately, the Chinese government has an interest in us.
So, we have a very, very secure base that if China started to do what people think they do, which they don't, not on a government level certainly and we're involved in a government level. Obviously, there are people who could come along and back engineer this product. It's not difficult. But then it's a bit like you break into a pharmacy and you steal chemotherapy drugs, what do you do with them? You don't know how to apply it. You don't know what the patient is suffering from. You don't know the rate, you don't know the dosage. And also it's taken us eight years to get traction. So, if somebody comes with a second product, they can call it what they like, but it hasn't been tested even though they guarantee that it's the same as Phoslock it's not the same as Phoslock, and the government authorities are determined not to make things worse.
So, I've tried to cover every base that I can, but the bottom line is the relationships in China. That's terribly important and our relationships with the Chinese individuals and the people who are working for us. We have 60 people in China, engineers, chemists, analysts, et cetera, and our own factory. We're a legitimate Chinese corporation. So, I've tried to cover every base that I can for its security.
So, as things stand, you've got effectively a global monopoly in locking up phosphorus in lakes and canals?
It's not a monopoly because there are competitors. In many countries they use alum... Sorry. In many countries they use copper which is now banned in many countries, and alum which is banned in most countries except for the US because there's a major lobby there. Alum is a product made with aluminium salts and if very carefully applied, locks up phosphates for phosphorus for a while but then releases it. It also, if it's not exactly properly prepared and applied, it kills fish and plants. But in America it's like a tobacco lobby, a huge lobby.
But we are now testing in The Everglades in Florida and there are quite a few states that recognise the dangers of alum and are now getting to grips with Phoslock. As a result, we're doing testing and with some spectacular results wherever we go. I think in probably in the 300 applications that we've had, I don't think we've ever had one failure.
No, well in fact, I'm looking at a picture from a recent presentation showing the Beijing Canal or a Beijing canal. March, 2018, covered in algae and then September, 2018, all cleaned. It's amazing.
Yeah, it is quite extraordinary.
So, that's the consequences of it. And so, that happens all the time, does it?
Yes. Well, what's happened is as we've got global warming and this and the algae gets stronger and stronger, the smell, the putrification, the lack of fish, it's coming from grass roots now to government. So, people are driving by, say, in Florida and across the United States saying, "Gee, I used to fish in this. I used to swim in this when I was a boy or a girl and now I've got to shut my car windows when I drive by because of the smell and this green pea soup floating around." And they get onto their local authorities who get onto the state authorities who are now getting onto the federal authorities. We've had Phoslock now certified by water testing authorities around the world to the point that we are certified to use it in drinking water for human consumption. So, that's how far we've progressed and...
I was going to ask about that. You've got another slide in the presentation talks about the breakthrough application, the human consumption approval in Europe. So, you're putting it now into drinking water reservoirs, are you?
Yes, and that's a huge problem because they've got... All of these drinking water authorities having massive filtration chemical additions, et cetera, to get rid of all of these sediments and algae and other obnoxious substances in the water and it's hugely expensive. Not only that, but normally when they clean out a reservoir or attempt to clean out a reservoir, usually by chemical means, because in these reservoirs there's no fish or it doesn't matter if there's fish or plant life, but they have to stop the water supply because they raise all the sediments. They have to, whatever they do, dredging the bottom or cleaning out with chemicals, they have to stop water supply to a city or a town and they have to get water in from some other means. Also, very expensive. With Phoslock you don't have to do that.
We've just done... That picture is of a major reservoir in Belgium and we applied Phoslock over a few days, it dropped the phosphate level by something like 90 plus percent and they didn't have to switch off the water. And now they don't have to use as much chemicals or filtration in the water that's coming out of the reservoir going into the town supply.
So let's talk a bit about the potential market here. You sort of made a brief reference to the amount of money that the Chinese government has put aside for this. What are we talking about in terms of the potential market in China, and then perhaps we can talk about the rest of the world?
Alan, I don't know. It is so big. I'm not putting... We're not putting numbers on it at this stage. We put our 4C out and another release to the ASX a couple of days ago and we said in that that until we know the size of just this one Kunming area, let alone... and that's one area of one province of one country. We are not actually going to make a forecast because I don't ever want to make a forecast that I can't make sure that we achieve. And the negative of these applications is the time that it often takes to get from studying it, to testing it, to doing a contract, to actually applying it and getting paid. I'm nervous in a positive way in that I'm reluctant to put numbers on it, but if you look around the world, there isn't a country, probably Antarctica maybe, that doesn't have a phosphorous problem. Every country in the world right across the planet has this problem and it's growing every day and people are getting more and more concerned about the fact that they can't fish, swim, and the smell.
And certainly, in China, they are leading the world in their determination to fix this problem. It's not a problem that's going to be fixed in 10 years or 20 years or 50 years. It's longer than that. As long as we have the connections, we will be in the forefront of it. And we've tested and tested and applied and applied to the point where we've now got enormous levels of confidence in China, and we haven't yet approached Indonesia, Thailand, Malaysia, Singapore, Hong Kong, Japan. We have not even approached... We've had approaches Korea; we've had approaches and we've not... I've said we are going to do what we can do, what we can achieve in China, Europe and North America and a bit in South, in Brazil, where we've done one lake now three or four times.
So, we're husbanding our resources, we're about to build a new second factory. And by the way, a factory's very cheap. This product is made in essentially a large Mixmaster. You put the bentonite and the tantalum in with water, mix it up. It has an exothermic reaction. In other words, it creates its own heat, changes the molecular structure of these two elements, and then you have to dry it and crush it, only because it's cheaper to transport dry material, and then you use a barge to throw it in the water. Having done all the chemical analysis and the dosage, et cetera. I don't want to make it sound too simple. It's very complex. But the simple side of it is manufacturing it and getting the product, and now having the confidence by all these water authorities growing every day.
Exploding sales revenue and 50% margin is a recipe for competition. I mean, you can't possibly continue to have it on your own, can you?
Well, if we have a big brother, which we do, and we have the Chinese actually owning us, part of us, I'm the largest shareholder. I've got about 16% or 17%. Zhigang Zhang has about 7% or 8%, and the other Chinese probably have the same amount again. So, we together, own something like 30%, we control, the ownership. But more importantly, they have their investment and all of them have become... Now, the market capital of this company has gone from virtually zero three years ago to, I think it's $800 million now.
And I've done it all without any debt whatsoever. We have no debt and we don't expect to be using any debt to expand the factory. We'll do it out of cashflow. But you're quite right in your question. Yes, it'll engender a lot of people looking at it to see what they can manufacture. But I would say two things. It takes a long time to work it out. Secondly, the people, the customers are extremely cautious, the most cautious customers you could possibly have. That's our experience and they will not just go and buy another product because it's a bit cheaper. And by the way, with a 50% margin, if we did have competition, I've got no problem in fighting off any competition with a 50% margin. I've got a lot to play with.
Yes, indeed. Now you were saying, I think you said that 70% of your last quarterly cashflow came from China. Is that going to increase or would you spread yourself more around the world in time?
Well in time. The whole of the United States we've had... we haven't been able to afford to have staff. So what we've done is we've employed agents around the world other than in China, because our factory was there and we had people there, we developed the sales. We brought the Chinese in as owners of the companies. And they paid, by the way, everybody who owns shares in the company and staff and directors paid for those shares. Nobody got anything for nothing. So they have a sense of value and they've all become multimillionaires, on paper anyway, as a result. But coming back to your question, we are using agents. It means that all we do is we supply the product and the technical expertise and work with them to develop sales. So for example, in South America we have an agent who travels around and the company, and there's Lake Pampulha that we've done now I think three or four times.
This is another aspect of this thing. In China, they will say we're going to do the whole watershed so that all the water coming in is clean. In Brazil, they can't afford that. They can't afford to build the infrastructure to have sewage plants and stop factories polluting water and allowing their wastewater to go out and stop farmers from throwing stuff into the rivers on their properties. So what they do is every three years or so we redo Lake Pampulha. It’s cheaper for them to do that then to build the infrastructure and this is a situation in many second or third world countries. So we are now developing an annuity business for our product and we can expand globally by appointing another agent to another agent to another agent without going to the difficult task. And this is the risk that small companies run when they suddenly get big, is the transition from smell of an oily rig to corporate people running around the world and travelling in the front of the plane. That's not happening with Phoslock.
And my experience has been, as you would know, with EquitiLink building it from zero to... $7 billion for fund management around the world and channel 10 when we bought it with Izzy Asper and the group that we came in with. It was losing $1 million a month, a week and we turned it around to be more profitable than both Seven and Nine combined within three or four years. So my experience is growing companies and being able to make the transition from being tiny to being big and I'm working very hard to do that. And also to protect obviously our footprint around the world.
So the plan then is to stick with agents. How much do you have to give the agents?
Well, partly, not totally because we've now I've got $20 million cash in the bank, positive cash flow profits and so we are looking at a small expansion. And my target is the US where we have major competitor in Alum but a very, very good fight where we can show the negatives of Alum compared with the positives of Phoslock but they have a lot of money as their lobbyists go around the country. So we're progressing with how we attack and approach the US. We have one agent, we'll have a number of agents coming up and we will be, I think, expanding dramatically in the US in the next 12 months. Certainly, in Florida where there's a very strong move to clean the place up in these wetlands. Environmentally they can't use and they won't use Alum, it kills the fish, it kills the plant life if not properly applied and Phoslock does none of those.
And so it's going to be a ground running from the ground up in terms of how we go about marketing. Each country will be different, but my focus is Europe where we've done probably 150 lakes and reservoirs in Europe. We've just done the Serpentine, by the way, in London for the second time. We Did it for the Olympics and we've done it again. I've just seen a photo of some kids swimming in it, which they couldn't four weeks ago. By the way, Phoslock works instantly within 24 hours. You throw it into the water, it goes down, it locks up the phosphorus molecules. Sits at the bottom as an inert mud. The plants grow straight through it and the water is clarified immediately.
So the algae just dies straight away, does it?
No, the algae goes slowly because the algae is starving. But the phosphorus, the food is gone. So the food has gone overnight. So the way that we measure success is the drop in the phosphorus level and that's within 24 hours. It goes down by. Well, in one instance 93% in 24 hours, then the algae takes time, obviously to die.
Obviously, the market has just caught on that the stock's gone from 40 cents or 43 cents to a dollar 40 in what, a couple of months? It sounds like you'd be thinking that that’s...
I'm not unhappy with Alan, but on the other hand, the reason it's done that is because up until the year and a half ago, essentially, we had mums and dads investors. I'm the largest investor and Rob Schuitema the managing director is probably the third largest now and a whole lot of people who knew us and followed us and bought the stock. We're now, I think we've got probably 20 institutions on the register. The number of shareholders has doubled probably in the last nine months and they're looking for big licks because we tick every single box. We tick the green box, we tick the ethical box, we tick the environmental box and we don't have any debt. We've got, I think, pretty good management and the board of directors that are devoted, involved and very experienced.
Brenda Shanahan came on board, and Brenda has a huge background in funds management. She was a director of EquitiLink. She's on the board of Challenger. She resigned from Challenger to come on our board. She's enormously experienced with the internal operations of corporations, remuneration, accounting, et cetera. Rob Schuitema who's background is in corporate finance for many years, works day and night, and we've got a tiny staff here in Sydney and then we've got the Chinese and we've got 60 people in China. And Zhang brought most of those people from BHZQ, this huge company. And essentially their future is brighter with us than with BHZQ and they're all part owners of the company. For which as I repeat, they've paid for their shares. They were all a performance options that they bought.
I have to leave it there, Laurence. Thanks very much.
All the best, cheers.
That was Laurence Freedman, the Chairman of Phoslock Environmental Technologies
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