Agri Energy Limited
Level 9
644 Chapel Street
South Yarra, VIC 3141
Date of lodgement: 07-Feb-2007
Title: Open Briefing®. Agri Energy. Chairman on Strategic Additions
Record of interview:
corporatefile.com.au
Agri Energy Limited (ASX code AAE) recently announced a name change from
the previous Australian Ethanol Limited. The share price has slipped from around
that time. Can you explain the fall in share price when it seems you have made
several positive announcements lately?
Chairman Peter Anderton
The last few weeks has seen the Company conclude a number of outstanding
issues which were hanging over the Group’s plans to proceed in a definitive
manner. The most significant has been the finalisation of the total debt and equity
requirements for the Beatrice Biodiesel Project.
I had expected the investment market to see these announcements as extremely
positive. We have now eliminated the project’s financing risks to progress the
strategy and plans for the Group. Our flagship project, Beatrice Biodiesel, is going
extremely well. Construction is progressing ahead of schedule. It is on capital
budget and on time to meet the September 2007 production and cash flow target.
Other positive announcements are the planned acquisitions of Central European
Biofuels Pty Ltd and an agricultural services business in Australia. When
completed these acquisitions will provide great impetus to our growth with a low
cost of entry point. These are excellent deals and great opportunities for the
Company. They are consistent with our strategy of becoming more integrated with
the upstream feedstock supply, partly to capture more of the value chain, but
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mostly to mitigate risk and increase our control over the critical components of our
cost structure.
Another issue that has come to light in the last few days and which appears to have
caused some confusion in the investment market is the recent ASX substantial
shareholder announcements. After the recent capital raising and placement, our
substantial shareholders are reporting their revised shareholder position to the
ASX. As a result, the overall percentage holding of the long standing core
shareholders in the Company has reduced, despite the fact that these investors
supported the recent capital raising and have actually increased their quantum
shareholding in AAE. This is a result of the size of the placement which more
than doubled the size of the company, and introduced of a number of substantial
investors onto the register.
corporatefile.com.au
What about the impact of higher grain prices and how that is affecting the ethanol
and biodiesel industries in the US?
Chairman Peter Anderton
High grain and commodity futures in the United States and a recent decline in oil
price have put pressure on current biodiesel and ethanol producers. That appears
to have spooked investors. The higher grain and vegetable oil futures have been
driven by speculators who have entered the bio energy space through the
agricultural input side and as a result have distorted the grain market futures. This
is forecast to correct itself in the second quarter when the United States grain
planting figures for this year are released.
Soy and soy oil prices are forecast to come off in April 2007 once the new planting
figures are released. This will occur for three reasons. Firstly, soy and soy oil
stockpiles are at all-time highs. The current mismatch between the physical
market and the exchange traded or derivative market is not sustainable. Secondly,
world plantings have increased significantly in reaction to a perceived global
increase in demand for oil for the purpose of biodiesel production. From this,
we’ve seen higher derivative prices. Thirdly, a number of biodiesel projects
announced over the past couple of years have not reached the financing stage, and
so will not progress. These factors, together with the food industry’s worldwide
switch to palm oil, have led to a significant reduction in demand for soy oil in the
short to medium term against what was originally forecast. These assumptions
were confirmed at the Biodiesel Conference in Arizona earlier this week. AAE is
eight months away from production, so we are confident that the soy oil market
will be more balanced by then.
We in fact consider the high world commodity prices and the lower oil price to be
good news for biofuels projects that are still in production (such as ours), as it has
put a brake on biodiesel and ethanol development globally and in the US in
particular. This has resulted in a rationalisation of the industry. That’s a positive,
as it will stop poor quality projects from coming online as well as possibly shutting
down those that aren’t performing either because they are either too small or do
not meet biodiesel product specifications..
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corporatefile.com.au
What is AAE doing to mitigate the risk of high input costs?
Chairman Peter Anderton
The investment market does not appear to recognise the local basis (or discount)
position on the purchase of feedstock in local regions such as south eastern
Nebraska. In this region for instance, the physical price for soy oil currently trades
US3-5c/lb below the futures price on the Chicago Board of Trade (CBOT). The
current soy oil physical price in Beatrice is in line with our forecast for production
later in the year.
We are working with our soy oil supplier, CHS Inc., to lock in contracts and
margins for when the Project comes on-stream. The Australian share market
appears to rely on the CBOT commodity price to analyse project cash flows and
not the local price that is negotiated in particular regions. South East Nebraska is a
very competitive location for soy oil and corn, particularly in the current market.
One of the hardest issues for AAE to deal with is that the Company is consistently
compared to the biodiesel producers here in the Australian market where securing
feedstock and offtake contracts are significant issues. These, along with
unfavourable legislation, technology and engineering issues in a number of cases,
have hurt all domestic producers and tainted the investment community’s
perception of the biodiesel sector.
AAE is not planning an immediate entry into the Australian biodiesel market and
as such we should not be judged in that market. Our strategy is to produce
biodiesel in the US, where producers of quality B100 receive a US$1.00/gallon
subsidy, and ethanol in Australia where there is currently a significant fuel ethanol
shortage. President Bush’s recent State of the Union address emphasised the
growing dependence of the US on the biofuels industry - all of which is positive
news for the industry and should be positive news to investors.
corporatefile.com.au
Can you explain the name change to Agri Energy, particularly the implications for
your growth strategy?
Chairman Peter Anderton
The new name better reflects the Company’s businesses and strategy. We are a
unique group operating both in biodiesel and ethanol, and possible in the future,
bio-lubricants. We have a global strategy, in both ethanol and biodiesel, to be
producers in the major markets in Western Europe, the United States and
Australia.
In addition, AAE is focussed on the key operating cost differentiator in the
industry - agricultural commodities. Our global strategy for cost competitive feed
stocks is intended to put AAE at the bottom of the cost curve once we are in
production. For instance in Europe, low cost oil seed from Eastern Europe is sold
into the heavily mandated and subsidised Western European biodiesel markets.
Our European strategy incorporates this.
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corporatefile.com.au
Can you describe the corporate structure of Agri Energy and its main projects?
Chairman Peter Anderton
Agri Energy Limited is an Australian company listed on ASX and holds interests
in subsidiary companies in each country in which the Group operates. The incountry
subsidiaries hold an interest in each of the operating entities to optimise
taxation and cash flow benefits to Agri Energy.
AAE owns US Canadian Biofuels Inc in the United States, Australian Biofuels Pty
Ltd in Australia and Central European Biofuels Pty Ltd (once the acquisition is
finalised) in Central Europe. In turn, those holding companies own and operate
each project which is structured as a separate corporate entity.
For example Agri Energy’s subsidiary, US Canadian Biofuels Inc, a Delaware
Corporation, owns all of the shares in Beatrice Biodiesel LLC and Beatrice
Ethanol LLC which are the operating entities for each project. All international
subsidiaries and operating entities are wholly owned.
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What is the status of your two foundation projects - the Beatrice Biodiesel Project
in Nebraska and the Swan Hill Ethanol Project in Victoria? Are these progressing
to schedule? What’s the biggest risk for Beatrice?
Chairman Peter Anderton
I was in the United States last week and attended our US Canadian Biofuels Inc
Executive Committee Meeting. The Beatrice Biodiesel Project is now fully
funded and progressing to budget and to schedule. The implementation strategy is
working as planned and is currently reflecting the cost saving benefits we factored.
Alberici Constructions, the construction manager, is performing extremely well
and we are very impressed with the site quality, safety and performance. At this
stage, the Group remains confident of an August 2007 commissioning and to be
fully operational by September 2007.
Progress on the Swan Hill Ethanol Project was delayed until we secured finance
for the Beatrice Biodiesel Project, which we have now done.
Up until that point at Swan Hill, we had concentrated on completing engineering,
purchasing equipment, minimising design and construction risk by completing
final construction drawings, and locking in pricing. This process has been very
successful in reflecting some significant design improvements including improved
logistics and implementation options and securing firm prices for a major portion
of the facility. The overall effect has been a reduction in project cost and a higher
confidence level in the final costs.
The biggest risk to the company lies in our ability to manage the remainder of the
construction process. Alberici is the largest industrial contractor currently
operating in Nebraska and has a history of delivering industrial projects
successfully. We’re now committed to over 80% of the capital costs of Beatrice.
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Design and procurement is complete, hence eliminating design and scope risk.
The concrete works are substantially complete, and a so far mild winter has been
of benefit. Our strategy of spending the money up front on the design and
planning before we let contracts begin or commence on site works is paying off.
We remain confident on this front.
corporatefile.com.au
Thank you Peter.
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