ferret's stock to watch: australian ethanol ltd

Ferret's Stock to Watch: AUSTRALIAN ETHANOL LIMITED
08:40, Wednesday, 27 April 2005

A COMPANY SURVIVING AGAINST THE ODDS IN NEW INDUSTRY

Sydney - Wednesday - April 27: (RWE Australian Business News)
*************************************************************

OVERVIEW
********

The huge surge in energy prices this year has given the ailing
ethanol industry a new lease of life, especially with its potential to
reduce greenhouse gases with ethanol blended fuels.

At the weekend Deputy Prime Minister John Anderson urged the
Coalition to provide greater support to the ethanol industry.

He now believes the scientific advice provided by the CSIRO and
put before Cabinet in late 2003 was not the whole picture.

"A lot of overseas research told a different story," Mr Anderson
declared.

The Deputy Prime Minister now supports the introduction of
American-style clean-air standards.

Australia's only public ethanol company is Australian Ethanol Ltd
(AAE).

It was formerly listed as Indcor, with shareholders approving the
name change last year.

As Indcor it used the government's Biofuels Capital Grant program
which is giving a twelve-year excise relief package.

It is part of its environmental cleaner fuels policy legislated
for the fuel industry in Australia.

The grant is helping Australian Ethanol to become a major
Australian ethanol producer and distributor.

At the end of March Peter Anderton, chairman of Australian
Ethanol, talked to Corporatefile about where the company is today.

Mr Anderton said that since December the company had completed
the Swan Hill Ethanol Project Definitive Feasibility Study and presented
the document and outcomes to its partners, Mitsui & Co (Australia) Ltd.

"We've maintained a watching brief on the outcome of the Tri
State Ethanol Company LLC sale to the Tri State Financial Group in the
USA," he said.

"In the past two to three weeks, Australian Ethanol has presented
the Swan Hill Ethanol Project to two lending institutions in Australia.

"Since the beginning of the year we have also undertaken and
completed analysis of two alternate ethanol opportunities identified by
the company," the chairman added.

He told Corporatefile that the outcome of the Definitive
Feasibility Study is that the Swan Hill Ethanol Project meets the
targeted investor returns at an assumed long-run oil price of $US30 per
barrel and exchange rate of US70c providing the fuel ethanol produced at
the Swan Hill facility can be sold into the domestic fuel market.

The assumed ethanol sale price is between 10c and 15c per litre
discount to the capital city Terminal Gate Price for unleaded petrol
corrected for GST.

At higher oil prices the economics improve as the sale price
structure is tied to domestic fuel pricing.

The Swan Hill Ethanol Project maintains positive cash flow down
to a break-even oil price of around $US21 per barrel, assuming a
long-term exchange rate of around US70c.

SHARE PRICE MOVEMENTS
*********************

Shares of Australian Ethanol yesterday traded at 24.5c. Rolling
high for the year has been 58c and low 17c.

The Definitive Feasibility Study assumes grain prices at levels
contracted with the local growers for corn and long-term local forecasts
for dry land feed wheat and barley prices.

Distillers' grain revenues are at pricing levels included in the
take and pay contract with the international co-products group, James &
Son, with which the Swan Hill Ethanol Project is contracted.

The capital cost of the project is higher than previously
estimated - a direct result of the current overheated construction
industry in Australia and the current skills and labour shortages.

Since completion of the Definitive Feasibility Study, the
long-run international forecast oil price has increased to well over
$US32 per barrel.

Asked about the difficulty of financing the Swan Hill Ethanol
Project, Mr Anderton admitted it was not easy.

Despite the good intentions of many ethanol project proponents in
Australia and the biofuels capital grant support given to the
Queensland ethanol projects, not one start up project (or expansion) has
been financed and approved for construction to date, he said.

This is because, without an ethanol offtake contract, lending
institutions will not consider supporting an ethanol project even if
substantial equity is put in place.

Industry needs trail blazer
***************************

The industry needs a trail blazer to establish a stand-alone
ethanol business, to prove up support from the retail transport fuel
industry and prove commercial viability, the chairman believes.

Better still, endorsement from the major fuel refiners in
Australia by way of an ethanol offtake agreement is needed.

But it's a Catch-22 because the major fuel groups will only
contract an ethanol offtake if the company has proven and demonstrated
operations and supply capability.

However, to finance the development and construction by
traditional project financing means the company needs to secure an
ethanol offtake agreement with one of the major oil groups to demonstrate
operations and supply capability.

The reason for going to the US was to establish production
capacity and demonstrate proven performance in the industry in order to
gain market and industry credibility to meet the major oil company
requirements for offtake.

Mr Anderton explained what went wrong with the bid to acquire Tri
State in the US.

"When we bid for the acquisition of Tri State Ethanol Company LLC
at the bankruptcy trustee auction, Australian Ethanol Limited through our
US subsidiary, ABUS LLC, bid on the basis of having in place:

* A seven week settlement time frame;

* A security package consisting of a bank guarantee from a US
investor for the full loan facility requirements;

* A conditional loan offer from US Bank with the critical
condition being the security package;

* A secured ethanol offtake from a recognised major group on
terms suitable to ABUS LLC; and

* A natural gas supply contract on commercial terms suitable to
ABUS LLC."

He said at the time of bidding all these were satisfied and the
company was the successful bidder.

Fifteen days prior to closing, US Bank introduced a further
condition requiring a full in-house due diligence of the ethanol industry
in South Dakota.

The due diligence was estimated to take four to six weeks to
complete and made the US Bank conditional loan offer unworkable.

Critical steps for future
*************************

Mr Anderton says the critical step for Australian Ethanol now is
to put in place an acceptable debt facility with an Australian-based
lender to develop the Swan Hill Ethanol Project.

It's intended that the finance package will be supported by an
unconditional bank guarantee arranged by the company and put up by the US
investor group.

The arrangement shifts the risk from the lender to the investor
group which will enable project finance to be put in place without a firm
take or pay ethanol offtake contract.

"We are presently working to finalise this," Mr Anderton said.

"At the same time we're working with Mitsui to finalise the joint
venture agreement and more definitive ethanol offtake arrangements.

"These two processes are expected to take another four to six
weeks," the chairman claims.

BACKGROUND
**********

Shareholders approved a company name change last year to the more
appropriate description of Australian Ethanol from Indcor, which
previously emerged from a backdoor entry onto the Australian Stock
Exchange through Crest Magnesium in February 2004.

Australian Ethanol proclaims its mission is to create a
profitable and sustainable ethanol business in Australia and, where
appropriate, overseas.

It aims to provide shareholders with commercial long-term returns
by adopting a smarter approach to the development of industrial projects
in its core markets, and currently has a number of preferred project
development sites in regional Australia.

The company is also pursuing profitable international
opportunities to deliver early sustainable cashflow in fuel ethanol
production and distribution.

Global market drivers for fuel ethanol use include the rising
price of oil, declining domestic production, and energy security.

Countries such as Brazil, the US and Sweden have found blending
fuel with ethanol is a key strategy to lowering 'at the bowser' costs of
fuel, enhancing energy security and improving fuel's environmental
performance.

After some controversy, the fuel ethanol industry now has the
legislative support from the Australian Government to provide certainty
for industry development.

In 2004, the Australian Federal Government legislated an excise
(tax) relief package for fuel ethanol allowing an excise-free period
until June 30, 2011.

From July 1, 2011 to June 30, 2016, the fuel ethanol excise will
be phased in in five equal instalments to its final level of 12.5c per
litre.

This compares to excise on unleaded fuel of 38.143c per litre.

In addition, the Federal Government's cleaner fuels policy
legislates for the fuel industry in Australia to improve the
environmental characteristics of fuel.

This legislation is likely to require clean fuel additives such
as ethanol to improve environmental performance.

The legislative environment provides a sound and robust base for
Australian Ethanol Limited to become Australia's premier fuel ethanol
producer and distributor.

ENDS

>>>>>>>>>>>>>>>>>

I don't hold AAE