28 March 2008Agri Energy Limited – Update of ActivitiesThe Board...

28 March 2008

Agri Energy Limited – Update of Activities

The Board of Agri Energy Limited (AAE or the Company) announce the following update to the Group’s activities.

The global biofuels market continues in a cycle of fluctuating margins and low production utilisation. Continuing high agricultural commodity prices have only partially been offset by the recent rise in energy prices, even with crude oil breaking through US$100 per barrel and showed further strong support to US$110 per barrel. In addition, the recent turmoil in the United States and global financial markets has limited appetite for investment funds into the sector.

The main focus of the Company is the Beatrice Biodiesel Project. With the increase in feedstock prices in the second half of 2007 which continued through January 2008 to early March 2008, the Company suspended all construction and testing activity at Beatrice in early 2008 and is reassessing the Group’s options for the future.

Since September 2007, the Company has embarked upon a concentrated effort to attract investment to fund project overrun costs and increased working capital requirements. These efforts have encompassed refinancing of the senior debt, equity investment in the Company, partial sell down of the Beatrice Biodiesel Project and as well as the outright sale of the United States operations. The Company reached in-principle agreement with a number of parties in relation to these transactions. However, in all cases, the transactions did not reach financial close. During the period of these discussions, the industry experienced continuously inflating feedstock prices which resulted in declining project economics and even negative returns to the project at some times. The deteriorating industry returns, combined with industry uncertainty and overall United States investment climate, has made fund raising for the project extremely difficult.

In early March 2008, soy oil prices on the CBOT peaked at US$0.70 per lb, a record high. By contrast, when the project was initially financed in late 2006, long term soy oil prices were forecast at US$0.23 – US$0.28 per lb. At that time biodiesel prices where US$2.70 – US$3.00 per gallon and technical grade glycerine was around US$0.25 per lb. Currently spot biodiesel prices are over US$5.00 per gallon (term contracts are US$4.50 per gallon) and technical grade glycerine attracts a sales price of around US$0.70 per lb. The strong increases in biodiesel and glycerine have been totally offset by the feedstock increase resulting in forecast margins falling from US$36 million annually (in late 2006) to zero or negative in early 2008.

Recently there has been a significant drop in soy oil pricing to around US$0.55 – US$0.58 per lb. This has improved the overall project economics and, if in production today, the project would provide strong operating margins and investment returns. The soy oil price drop has also provided the basis for seeking renewed interest in the investment opportunity of the Beatrice Biodiesel Project.

In addition, the Company has pursued alternative feedstock options for the Beatrice Biodiesel Project using imported vegetable oil and locally produced tallow and animal fats. While these options have attractive economic benefits, there is a capital cost requirement which would add further investment pressure to the project.

Due to the delays in project completion and the requirement for additional funds, the project finance debt facility with Home Federal Savings Bank and Agstar Financial Services was no longer within its agreed covenants. To address this, the Company signed a Forbearance Agreement with the project senior lenders on 14 March 2008. The Forbearance Agreement includes a stand still of loan payments until 30 June 2008 and financial support for additional work at site and is subject to a requirement to engage a broker to undertake a process to sell the project in an orderly manner as a completed facility.

The Company plans to recommence work at Beatrice and prepare the plant for start up and wet commissioning. Funding for these works is provided for under the Forbearance Agreement and is from release of cash on deposit (US$1.23 million) and the sale of soy oil held at the site (approximately US$1.5 million). The Company has engaged the experienced biodiesel operating group, Virtuoso Biofuels Services, to complete outstanding work and manage the plant testing and start up in conjunction with the technology supplier Axens. The United States operations have been restructured with a rationalization of costs.

The Company is assessing proposals from business brokers in the United States with a view to appointing one to manage the sale process. With continued fluctuations in the feedstock and fuel price an assessment of the potential sale value of the Beatrice Biodiesel Project is difficult to establish. Prior to the recent drop in the soy oil price on the CBOT, value was assessed against negative EBITDA margins. At current soy oil and biodiesel commodity prices, the value can be assessed against a positive EBITDA of US$5–20 million per annum.

Due to the uncertainty in assessing the value of the Beatrice Biodiesel asset, the Board has resolved to delay finalization and presentation of the audited half year corporate accounts which will now hold the Beatrice Project as an asset for resale. A clearer market value for the asset will become evident once acquisition proposals are received by the Company. The Company has creditors of approximately $1.4 million in Australia and US$9.0 million of construction creditors plus the Cornell debt facility of US$4.5 million and the project finance debt of US$28 million. The Company has engaged a corporate advisory group in Australia to advise the Board with regard to management of creditors and operations going forward
during the sale process of Beatrice.

The Company ceased all development activity in Australia in September 2007. European development has been curtailed dramatically and slowed to reduce cash outflow and provide time for a forecast industry improvement in the second half of 2008. The development program in Europe has advanced with the completion of initial basic engineering and preparation of an Investment and Debt Information Memorandum for the Central European projects. Potential project lenders have provided conditional debt term sheets for development of the Hódmezovásárhely Oilseed Crushing Renewable Energy Project, based on an agricultural and biomass power focus by the Company. Forecast project economics remain encouraging based on current industry market conditions.

The Board remain committed to maximizing the value of assets held and developed by the Company in an extremely difficult market sector and the most challenging investment environment in recent memory.

Yours faithfully
Peter Anderton
Chairman and Chief Executive Officer