looks spectacular

Title: Open Briefing®. Aust’ Renewable. Significance of Contracts & Capex
Record of interview:
corporatefile.com.au
Australian Renewable Fuels (ASX Code ARW) has recently announced two
sales contracts. The first is for up to 8 million litres of biodiesel over the
next 12 months with Bunbury based mining and earth moving contractor,
Piacentini & Son. The second contract with Caltex is for up to 5 million
litres per year of biodiesel from each of the Adelaide and Picton plants.
What is the significance of these milestones for your progress towards
profitability?
CEO Australia John Lillywhite
They are a great achievement and it’s a vote of confidence in us that these
customers are totally satisfied with the performance of our biodiesel.
Piacentini operates in the demanding off-road mining and earth moving
sectors where equipment performance and reliability is critical. As a refiner
and distributor of fuels to customers across Australia, Caltex insists on its
suppliers having the highest standards of reliability and quality. We expect
both Piacentini and Caltex to set an example to other large volume diesel
users and distributors to follow.
All our sales are structured to earn a positive gross margin, even at today’s
high feedstock prices, and contribute to fixed costs. When feedstock pricing
returns to historical trend, both contracts will generate a highly acceptable
net profit.
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You operate two biodiesel production facilities, one at Largs Bay, near
Adelaide, South Australia, and another at Picton, Western Australia with a
combined annual capacity of 90 million litres. What is your total contracted
volume? What level of capacity do you expect to be contracted by the end of
2007?
CEO Australia John Lillywhite
These two new contracts take our current Australian sales volumes up to an
annualised 33 million litres.
We’re negotiating sales contracts that will take us close to the capacity of
both plants. While we expect these to be signed during the September
quarter, production and sales may not rise to near capacity levels until the
first half of calendar 2008 due to the need for our customers to re-engineer
their terminals for biodiesel storage and blending.
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You are undertaking capital works to improve quality and capacity of
feedstock and to produce your process catalyst, Potassium Methoxide. What
progress have you made with the programme and when will you
recommence production? Are you achieving the cost savings and quality
improvements anticipated?
CEO Australia John Lillywhite
Our capital works program is at its current scope “on time, on budget” with
total commitments to date of $3.4 million of a $4.5 million budget.
A positive outcome of our capital works program has been further
improvement to operating performance so that tallow can now comprise one
hundred percent of our feedstock. For sales contracts where a particular
cloud point specification does not require the addition of canola, our
feedstock costs will reduce significantly. We’ll continue to seek customers
who are prepared to contract on this basis.
The bulk of the plant improvements in Adelaide will be completed by the
end of July with total project completion by the end of September. The inhouse
feedstock filtering project has been temporarily delayed due to the
worldwide introduction by major oil companies and distributors of a tighter
purity specification. We’ve ordered a variation of the filter for the same
cost to meet the new specification.
We’ve deliberately held back the Picton project as a risk management
strategy to ensure that the knowledge and experience gained at Largs Bay in
Adelaide are applied to Picton. Construction of the Picton methoxide plant
has been deferred until the boom economy pressures in Western Australia
have subsided and reasonable quotes obtained. Spot methanol prices have
retreated from a peak, and cheaper methoxide prices are expected for the
foreseeable future.
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Feedstock typically accounts for 60 to 70 percent of total biodiesel
production costs. What are the current price trends and what is the outlook
for tallow and canola prices?
CEO Australia John Lillywhite
Feedstock prices are highly volatile. For example, in April the market price
of tallow feedstock was weaker, at times around $516 per tonne. In May the
market price rose to $720 per tonne as livestock shipments to abattoirs fell
sharply in response to drought breaking rains, and soaring palm oil prices
led Asian soap makers to substitute tallow. Our feedstock price forecasts
are:
A$/tonne June July August
Tallow ’’ 840 860 840
Canola Oil ’’ 1200 1200 1100
Palm Oil ’’ 1100 1100 1100
We’re expecting prices to begin easing towards the end of next quarter. We
don’t use palm oil as a feedstock as we believe it’s environmentally
destructive.
Our response to this price spike was to immediately review our cost
structure. To date we’ve identified annual savings of $1.0 million in
corporate and operating expenses.
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In early May you announced that Payments 2 and 3 under the Federal
Government’s Biofuels Capital Grants Program had been approved by the
Department of Industry and Resources. Have you received that payment?
What is your current working capital position?
CEO Australia John Lillywhite
We’ve received the $5.4 million grant in full. These funds have allowed us
to proceed with our investment plans and importantly, winning that grant
has helped us negotiate the contracts we’re currently closing by
demonstrating the excellence of our production and quality capabilities to
demanding multinational oil companies.
Our current working capital position is sound. Cash at bank, inventory and
receivables are approximately $11.5 million while our current liabilities are
around $1.3 million. Our capital works will require approximately a further
$4.0 million in cash. In addition, we have an undrawn $7.0 million working
capital facility.
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Earlier this year your associate, American Renewable Fuels Inc. (ARF Inc)
was seeking further funding for its plans to build a biodiesel production
facility in Clovis, New Mexico, with capacity to produce 75 million gallons
(284 million litres) of biodiesel each year. What progress have you made in
the US? What is the role of Australian Renewable Fuels in the US
operation?
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CEO Australia John Lillywhite
We have a 65.5 percent shareholding in ARF Inc. which is about to
undertake an initial capital raising in the US to fund a feasibility study and
the ordering of items with long lead times. We’re advising ARF Inc. on
plant design, feedstock specification and technical partnering to use our
experience and intellectual property to ensure smooth construction and
commissioning. We’re not contributing to the capital raising.
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What are your major corporate objectives for the remainder of 2007?
CEO Australia John Lillywhite
We’re focused on closing the outstanding contract negotiations, assisting
customers with engineering their logistics solutions, storage and blending
requirements and moving the company to positive cash flow. The key
driver of cash flow will be future feedstock prices. We’ll complete and
implement our review of corporate overheads and operating expenses.
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Are you in a position yet to be able to provide earnings guidance to the
market?
CEO Australia John Lillywhite
While the current spike in feedstock prices may persist in the short term, we
expect tallow prices to move towards historical levels during the next
quarter. We’ll then release a profit forecast which will incorporate the
savings in corporate overheads and operating expenses. We’ll then also
quantify our deferred capital expenditure.
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Thank you John