Will anyone still be around for Hódmezovásárhely commissioning? 2 years maybe?
The fundamentals of the global biofuels industry continued to see extensive change over the December quarter. While world energy prices have escalated rapidly to where crude black oil prices have peaked at over US$100 per barrel, global grain and biofuels feedstock prices experienced even greater rate of rise over the same period. Biofuels production operating margins during the period were squeezed forcing numerous closures of operating facilities globally. In the AAE target geographic markets of the United States, Europe and Australia, the major portion of biodiesel and a number of ethanol facilities have been shut or operated at well below throughput capacity. The change in industry commodity price fundamentals over the past 2 years is outlined in the table below. <> In most instances these commodity prices represent all time high level and present a dilemma for any project developer and operator in forecasting the future outlook. In the assessment of the future and ongoing position of the biofuels industry, it is difficult to identify any reliable indicator with which to forecast future outcome. History reflects that during the past few years, all recognized forecasts across the industry have been grossly unreliable and inaccurate. For instance, in October 2007, as reported in the previous AAE Quarterly, soy oil price was at a perceived cyclic industry high of US$0.40-0.41 per pound. With substantial global stockpiles, significantly reduced biofuels demand and pressure from the food industry, analysts predicted a decline of soy oil price in late 2007/early 2008. However, over the past quarter the soy oil price has actually risen to all time high figures of US$0.54 per pound, very much contrary to industry generated information. The soy oil price appears not driven by the United States or global biodiesel industry at this time as substantial parts of biodiesel production in the United States is shut down or operating at well below capacity with new forecast production not proceeding as predicted. When the increased commodity costs are put into the project financial model the results are that the EBITDA returns reduce from a robust financial investment, based on the 2006 figures, to breakeven or negative margins on the higher commodity prices in late 2007. The scenario has seen investment (debt and equity) for new projects in the global biofuels industry dry up as the sector has experienced significant reduction in equity valuations and failure of companies to meet forecasts. The biofuels sector, including AAE, has experienced a sharp decline in stock price during this period. With delays and increased costs of the Beatrice Biodiesel Project in Nebraska, AAE sort to raise additional funds during the quarter. A Share Purchase Plan offer to all shareholders in September was not supported and withdrawn. In addition, discussions with major shareholders and industry investors reinforced limited investor support for the sector. In order to continue meeting its obligations, the Board resolved to sell selected Group assets and is further reviewing the longer term strategy. An assessment of other developments in the industry will be undertaken to position the Group for the inevitable next generation growth in biofuels. It is expected that the principal future strategy will be to ensure more control of supply costs by up streaming the business into non food based agricultural products In September 2007, the Company reorganized the Australian operations and put on hold all project development. The Australian workforce was downsized to key individuals to support corporate operations and international developments. The Australian ethanol project assets were sold in December 2007 to realize operating funds to assist covering the restructure costs in Australia and the United States together with the closing out of work associated with the Swan Hill Ethanol Project. In the United States, the Green Bay corporate office was closed in December 2007 with the Group United States activities focused in Beatrice. Mr. Bud Cummins was appointed Chief Executive Officer of US Canadian Biofuels, Inc. based in Beatrice. An even more difficult decision for the Board was consideration of the sale of the Beatrice Biodiesel Project in Nebraska. Forecast operating performance of the Project at current commodity prices show breakeven to negative margins. Industry forecasters anticipate this scenario will change in the short to medium term. However, without investment by the Company in the strategy to develop the Beatrice Oilseed Crusher and upstream the business into agriculture, the Group will be exposed to unacceptable commodity price fluctuations. Limitations on investment funds from existing or new shareholders means the Oilseed Crusher cannot be developed in the short to medium term at Beatrice as originally planned. The negotiations to sell the Beatrice Biodiesel Project for a sale price of US$42.5 million (net of the project finance debt to AgStar Financial Services) for a return to AAE of US$39.5 million was seen by the Board as the preferred outcome for shareholders. The sale covers the immediate corporate costs of AAE, eliminates further exposure to the US commodity markets and potential operating losses that the Company is currently not in a position to support. The sale at near full value of the Group’s principal asset will enable AAE to concentrate efforts on the Hódmezovásárhely Renewable Energy Project in Hungary which has a stronger agricultural focus. The Central European Project is less exposed to agricultural fluctuations as the feedstock supply is directly from a diversified group of producers and can be forward contracted. Europe is the largest biodiesel market globally and has extensive EU and government mandates for biodiesel consumption. Only last week the EU confirmed the aggressive 2020 targets for all member states. Funds expended during the quarter on investment in project construction, development and restructure costs in Australia and the United States was AUD$11.5 million of which AUD$10.9 million was expended on the Beatrice Biodiesel Project. Total expenditure on the Beatrice Biodiesel Project to date is US$61.7 million of which project debt drawn from the AgStar Financial Services is US$27.9 million. Cash held within the Group at the end of the quarter was $1.6 million. As part of the group restructure, Mr. Graeme Lay was appointed Company Secretary in December 2008. During the quarter, the Company was focused on raising additional funds to support the completion of the Beatrice Biodiesel Project and fund the requirements of the Company. The planned sale of 20% of the United States holding company, US Canadian Biofuels, Inc. for US$15 million was negotiated in November 2007 with Green World Energy Company, LLC (GWEC). AAE resolved not to proceed with the sale and terminated the agreement as a result of the parties not reaching agreement on the final documentation and concerns of AAE as to GWEC performance under those agreements. In December 2007, the Company entered into an agreement to sell 100% of US Canadian Biofuels, Inc. to Beatrice Biodiesel Acquisition Company, LLC (BBAC). BBAC is a company established by a local south eastern Nebraska investor group activities for the quarter corporate For personal use only Page 4 of 12 including senior management of Beatrice Biodiesel LLC to acquire, develop and operate the group assets in the United States. BBAC paid the initial deposit of US$1 million to AAE in January 2008. On 17 January 2008, the parties signed a Memorandum of Understanding to complete the sale process. The MOU includes further milestone payments in the form of a bridging loan in early February 2008 with anticipated financial close, subject to shareholder approval in March/April 2008. The sale price of US Canadian Biofuels Inc to BBAC is US$42.5 million and after repayment of the bridge loan of US$5 million, a return to AAE of US$39.5 million. The AgStar Financial Services project debt facility will be assumed by BBAC and remains the liability of Beatrice Biodiesel LLC. The net proceeds to AAE will be paid as follows • US$ 1 million (received in January 2008). • US$ 2 million in early February 2008 from proceeds of the bridge loan. • At financial close a payment of US$16.5 million (US$22.5 million less the deposit of US$1 million less the repayment of the bridge loan of US$5 million) • US$20 million as an earn out over 5 years relative to an EBITDA formula agreed in the MOU. The minimum payment under the earn out over the five years is US$15 million. Under the MOU, the US$5 million bridge loan is to be put in place by BBAC in early February 2008. From the bridge loan proceeds, US$2 million will be paid to AAE and the remaining US$3 million, contributed to construction completion costs for the Beatrice Biodiesel Project. The bridge loan is to be repaid at financial close of the transaction. Prior to the decision to sell the United States asset, the Company pursued an extensive range of fund raising alternatives and canvassed both existing and new investors broadly over the quarter. Based on share market performance, potential investor feedback and the funding requirements, the Company believes the proposed sale of the United States operations represents the preferred outcome of options available to the Company and is in the best interests of shareholders. The final sale is subject to shareholder approval and a meeting is planned to be called for late March 2008. A full Notice of Meeting and Explanatory Notes are scheduled to be forwarded to all shareholders in late February 2008. During the quarter, the United States corporate office in Green Bay, Wisconsin was closed. Group US operations have been consolidated to Beatrice under the leadership of the Chief Executive Officer, Mr. Bud Cummins. Support is being provided from the Australian and European operations for the final testing, start up and operations of the Beatrice Biodiesel Project. To assist funding requirements in the United States, the Company has arranged a loan through a local Beatrice Bank secured against land owned which was acquired for the planned Ethanol and Crushing Plant adjacent to the united states operations activities for the quarter For personal use only Page 5 of 12 Beatrice Biodiesel Plant and the office and accommodation facility in the Beatrice township. The loan facility is for approximately US$400,000. Following the AAE board resolution to sell US Canadian Biofuels Inc, further discussions with Oppenheimer & Co on the refinance the Beatrice Biodiesel Project have not progressed. The principle focus of the Group has been the completion and putting into operation the Beatrice Biodiesel Project in Nebraska. While the Project was substantially complete in November 2007, final mechanical completion and testing has been hampered by the performance of the main reactor vessels manufactured by Amer Corporation, together with severe cold weather and ice storms during December 2007. The two main reactor vessels were delivered and installed in early November 2007, four months behind the original contracted date. Subsequent onsite testing of the units in conjunction with the technology supplier Axens, revealed defects in the stainless steel liner installation of both reactor 1 and reactor 2. Following consultation with Amer Corporation and an independent engineer’s assessment of the defects and the repair program, the vessels were repaired on site and passed hydrostatic and corrosion testing in early January 2008. The two reactor vessels have now completed site hydro testing, cleaning and pickling, catalyst loaded and are ready for start up. For the remainder of the plant cleaning and pickling of all mechanical equipment, pipe work and instrumentation has been completed. The delay associated with the reactor vessels has enabled modification works to equipment recommended by Axens to enhance production efficiency and availability to be undertaken. All site works essential for plant start up will be completed by 31 January 2008. Although the reactor vessels have been fully tested at the site and passed all statutory and technical testing, final stamping of the two reactor vessels is outstanding pending resolution of a dispute with the manufacturer. Final stamping is required by the manufacturer to enable start up. The facility is ready for start up under the supervision of the technology supplier as of 31 January 2008. The Construction Manager, Alberici Constructors and all major sub contractors have been demobilized. The Beatrice Biodiesel Project operating team has taken over management of the site from the Construction Manager. The technology supplier Axens has undertaken extensive training and instruction of site personnel. With the exception of the FAME (fatty acid methyl ester) production building, all utilities, services, laboratory and other process facilities including the soy oil refinery have started up and operated at throughput capacity. For personal use only Page 6 of 12 As a result of the delay, forecast construction costs to completion of equipment testing, handover to the technology supplier Axens and passing of the plant performance, capacity and throughput tests have increased to US$61.505 million. This figure includes contingency of US$2.13 million. In addition, by commencement of operations, owners and preproduction costs for the project are forecast at US$9.054 million. Start up and working capital requirements for the project are estimated at US$9.8 million. The final construction and testing costs for the Beatrice Biodiesel Project are planned to be met from the proceeds of the bridge loan and fully drawing the AgStar project finance facility. Under the MOU executed with BBAC, a US$10 million working capital facility will be arranged by BBAC. The Company is considering its options to recover substantial damages for non performance by a number of project contractors. Damages are estimated to be between $5 and $10 million. An assessment of the financial model for the Beatrice Biodiesel Project based on current CBOT pricing shows breakeven earnings after payment of all operating costs and project interest payments. This is notwithstanding that the Beatrice Biodiesel Project is a high throughput, new technology facility with benefits of between US$0.30 – US$0.60 per gallon in biodiesel production costs. While the United States biodiesel (B100) price has risen to between US$4.00 and US$4.30 per gallon, at the same time the CBOT price of soy oil has increased to over US$0.50 per pound. These figures compare to US$2.70 per gallon (B100) and US$0.25 per pound (soy oil) when the project was originally funded in December 2006. The United States biodiesel industry, similar to that in Australia, has many operations either shut down or operating well below capacity at the present time. These margins could be improved greatly by proceeding with the overall Group strategy to build and operate an Oil Seed Crushing Facility and Cogeneration Plant at Beatrice as laid out in the Group’s longer term plan. By vertically integrating the business, the Project can achieve a higher level of control over the agricultural input prices, margin fluctuation management and mitigation of substantial supply risk. The facility proposed is similar to the plans being developed in Central Europe for a Renewable Energy Project making maximum use of all agricultural inputs. The strategy however will require a significant injection of capital. While financial returns from the Beatrice Biodiesel Project as a stand alone entity are not satisfactory at current commodity prices, a small change downward in the input cost of soy oil has a compounding affect on returns which would significantly improve returns. AAE also expects the margin can be improved once operations commence by contracting supply and offtake locally in South East Nebraska for part of the operations.
AAE Price at posting:
0.0¢ Sentiment: Sell Disclosure: Held
