Due Diligence and Valuation Report
Arrowhead Code: 94-01-06 Coverage initiated: 26 11 2015 Company: Environmental Clean Technologies This document: 11 07 2017 Limited i Fair share value bracket: AUD0.034 to AUD0.042 Ticker: ASX:ESI Share price on date: AUD0.013ii Headquarters: Victoria, Australia
Analyst Team Managing Director: Ashley Moore Shruti Gupta Jay Thakkar Website: http://www.ectltd.com.au/ [email protected] [email protected]
Market Data needed, thus eliminating the need to commit to 52-Week Range: AUD 0.012 – AUD 0.021iii bulk capacity while setting up a plant. Average Daily Volume: 3,760,782 iv Market Cap. on date: AUD 40.0 MMv Key Technologies – Matmor The Matmor process produces primary iron Financial Forecast Data (in AUD) through the reduction of iron oxides. Similar to ‘18E ‘19E ‘20E ‘21E ‘22E ‘23E Coldry, Matmor has a simple design, and is cost- High profit/ effective. The process uses Coldry’s output instead 6.0 5.6 16.1 28.0 28.3 28.5 (loss) MM of the more-expensive coking coal as a reducing High EPS 0.20 0.18 0.53 0.92 0.93 0.94 agent. (AUD cents) Low profit/ 5.3 4.4 13.1 22.9 23.2 23.4 Compared to the traditional blast furnace route to (loss) MM produce iron, Matmor benefits from lower cost of Low EPS 0.17 0.14 0.43 0.75 0.76 0.77 feedstock owing to usage of low-grade coal in the (AUD cents) process. Further, Matmor could also process iron ore fines and various iron oxide feed that is not Fiscal Year (FY) 1st July – 30th June suitable for production through the conventional Summary blast furnace process. Environmental Clean Technologies Limited (ECT) is Emerging Technology an Australia-based firm which is focused on On November 24, 2016, ECT announced the filing bringing its key technologies – Coldry and Matmor of a patent for its hydrogen-based metal oxide technologies – to commercialization. ECT holds reduction process, HydroMOR, which is an 100% ownership of Intellectual Property Rights to improvement on the Matmor process. HydroMOR both Coldry and Matmor technologies. utilizes hydrogen generated from low-rank coal to Key Technologies – Coldry reduce metal oxide to metal at low temperatures, reducing capital and operating costs compared to The Coldry process produces high-grade coal the traditional blast furnace route. equivalents by removing moisture content from low-grade coal such as lignite. The output is a In addition, ECT is also researching the suitability stable product with high energy and low moisture of the HydroMOR process for reducing high-value content equivalent to black coal. The product could metal oxide ore like Fe-Mn, Fe-Ni and Synthetic be easily stored and transported and has lower Rutile. The potential to create CO2 emission- carbon emissions. neutral steel plants is also being pursued, paving the way for lower carbon intensity. Compared to other technologies to dry brown coal, the uniqueness of the Coldry process lies in its Indian Integrated Project lower processing costs due to application of various ECT is focusing on its Indian project with NLC and features such as densification and utilization of NMDC, involving application of both technologies. waste heat. The modular nature of the technology The company aims to capitalize on the growing further allows for flexibility in expansion as energy and infrastructure requirements in the
Environmental Clean Technologies – Arrowhead BID 1 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
region, coupled with the need for cost-effective natural gas cost. This presented an opportunity to production of power and iron. enter into a long-term offtake agreement to supply Coldry Pellets in the Victorian market. On July 1, 2016, the company completed the Previously, the company upgraded the Bacchus techno-economic feasibility (TEF) study, which Marsh Coldry Pilot plant, which has increased its primarily focused on evaluating the technical and capacity to 15KTpa. Furthermore, ECT plans to the economic performance of the proposed plant, undertake a full scale up-gradation of its facility to including the financial metrics. Based on the recent expand to 35KTpa by November 2017. The structural changes in the energy market, ECT company is in discussion with customers to enter revisited the July 2016 TEF study. The study into the long-term commercial offtake agreement showed Matmor’s superior performance against for selling Coldry products. the negative effects of input prices, when compared with the traditional method. ECT has started a $3-5MM financing program with EFH, along with a $10MM term sheet with Brevet The Tripartite Agreement proposes a joint funding for its financial contribution towards design, for the construction of the combined Matmor Pilot engineering and construction requirements of the plant and Coldry demonstration plant. The capital integrated project, and also for the company’s cost of the demonstration plant is estimated working capital requirements. ECT has successfully INR150 crore ($30M AUD), to be shared equally applied for an Overseas Ruling application from among ECT, NLC and NMDC. ECT is targeting to AusIndustry for its Coldry R&D project. The construct a full scale plant following the R&D company is now eligible to receive rebates for phase; its construction is expected to start by overseas R&D activities. This was one of the two 2019. important clauses of the debt agreement with The Tripartite Agreement is focused on executing Brevet. The other requisite is that the Indian the Master Project Agreement (MPA). The MPA partners each contributed one-third funding of the outlines important aspects related to funding, key project is subject to finalization of MPA with NLC deadlines, planning and approvals terms, project and NMDC. ownership, expansion plan and marketing The company has also established a special strategies of the project. The agreement has been purpose vehicle ‘ECT Finance’, a wholly owned approved without any significant amendments by subsidiary ECT to support financing and lending NLC and NMDC. Since the project has the potential activities of the parent company. to enhance India’s economy, the parties decided to escalate the project under the review of the NITI Valuation Aayog (National Institution for the Transformation We believe that ECT’s portfolio of technologies of India Committee). makes it uniquely positioned to utilize low-grade Meanwhile, ECT, NLC and NMDC have entered into coal (more abundant but less usable) in high- an interim agreement outlining various aspects of margin, value-added applications. The the Master Project Agreement. The tripartite has technologies’ cost-effectiveness and simple also decided to start commercial preparation implementation would result in higher margins activities, with funding from NLC and NMDC. Also, with low capital intensity. ECT and NLC have agreed to start site preparations We believe that the company’s Indian Project will in Neyveli. Construction will be completed in 9 to serve as the global launch pad for its technologies. 12 months after the designing stage. The If successful and operational, the number of discussion regarding financing and construction of installations could increase multifold. The sale of Coldry and Matmor pilot plant are underway. ECT, Coldry Pellets in Victorian market will further NLC and NMDC will contribute in equal measure support the Indian operations. towards the project. Our valuation estimates are based on risk-adjusted Bacchus Marsh High-volume Test Facility intrinsic value of Coldry and Matmor plants in the ECT is offering solid fuel Coldry Pellets for the Indian integrated project and Bacchus Marsh steam and hot water boiler system markets in HVTF. Given due diligence and valuation Victoria. Coldry Pellets are cost effective and can estimations based on discounted cash flows, we be used as an alternative fuel in the steam and hot believe that Environmental Clean Technologies’ fair water boiler market. The demand for an alternative share value lies between AUD0.034 and AUD0.042. fuel in the market is increasing with the rise in the
Environmental Clean Technologies – Arrowhead BID 2 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Table of Contents
Company Presentation ...... 4
News ...... 8
Listing Information ...... 10
Contacts ...... 10
Major Shareholders ...... 10
Management and Governance ...... 11
Proprietary Technologies and Key Project ...... 12
Commodities and Markets Overview ...... 22
Value ...... 26
Analyst certifications ...... 29
Valuation ...... 30
Notes and References ...... 31
Environmental Clean Technologies – Arrowhead BID 3 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Company Presentation Listed on the Australian Stock Exchange (ASX: ESI), Environmental Clean Technologies (ECT) is working on developing leading-edge coal and iron-making technologies to convert lower quality products into high- end, value-added products. It focuses on two technologies, namely: I) Coldry: The Coldry process reduces moisture content of low-quality coal and enhances its energy content, resulting in a high quality output called Black Coal Equivalent (BCE). II) Matmor: Matmor is a process of producing high-quality iron using inexpensive and abundant brown coal and waste iron fines and slimes, rather than expensive coking coal and high grade iron hematite, in blast furnaces. The company is currently focusing on India, owing to the expected growth of coal/ iron demand driven by industrialization and urbanization in the region. It also plans to expand operations to countries with significant low-rank coal resources like Australia, Germany, Poland, Indonesia, China, etc. at a later stage. The company is also offering Coldry Pellets, an alternative to natural gas, in the steam and hot water boiler systems market across Victoria. ECT has been partnering with and engaging into strategic alliance with various EPC, financing, research and advisory parties to support the technological and commercial development of the processes. Financial Summary: As of December 2016, the company’s cash balance ($1,634k), coupled with the R&D incentive receivable ($1,004k), and was ~AUD2.3MM. On February 20, 2017, the company announced the option funding facility program for all ESIOA and ESIOB option holders to convert the options into Fully Paid Ordinary Shares. This offer will expire on July 31, 2017. ECT expects at least 20% of the options to be converted, which will provide sufficient working capital for the next 18 months to 2 years. To date, the company has raised approximately AUD3.4 MM from the exercise of ESIOA and ESIOB Options. ECT received an R&D Tax incentive refund of AUD 1.6MM in FY2016 relating to the FY2015 receivable. On January 2016, ECT raised AUD 1.5MM through 75.3MM ordinary shares issued via the exercise of 166,667 ESIOA options at $0.009 each, 25,000 ESIOB options at $0.015 each and 75.1MM ordinary shares at $0.02 each. As of June 2016, ECT has 1,216.7MM ESIOA options in issue. Once exercised, ECT will gain $10.9MM infusion of capital.
ECT, on December 23, 2016, said it expects to realize upto $1.5MM by end of February 2017 against the EFH Options exercise program of $3-5MM. The proceeds will be used for the detailed design and engineering of the Indian project and also for the company’s working capital requirements. In addition, for the Integrated Indian project, ECT secured $10MM term sheet with Brevet and the same will be used for ECT’s portion of the remaining capital requirements for the completion for the project.
In February 2016, ECT secured the loan facility with Brevet Capital, a US-based fund manager against the company’s accrued R&D incentives. In May 2016, the company withdrew AUD1.0MM against the loan facility. In August 2016, ECT extended the Brevet loan facility for the development of the project and to support its FY17 activities. It has been recognized with FY2017 R&D Finance facility. As of August 25, 2016, the company has withdrawn AUD0.6MM under this facility. As of December 2016, the company did not generate any operational revenue. If ECT successfully finalizes the negotiating offtake agreements, the supply of Coldry Pellets in the Victorian market will lead to significant revenue generation. ECT might be required to raise additional funds to cover capital expenditure. Historically, the company has been successful in raising funds when required. Moreover, other options could provide potential financing.
Portfolio and Premiums Promising portfolio of technologies: Both processes in the company’s portfolio – Coldry and Matmor – are cost-effective alternatives to the current methods of upgrading coal and producing iron, respectively.
Environmental Clean Technologies – Arrowhead BID 4 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Cost effective and easy integration: The cost-effective technologies and ease of adaptability makes the process more lucrative to potential customers. This is due to the following: – Low temperature and low pressure requirements: Coldry uses waste heat as low as 40°C, and the Matmor process operates below 1000ºC, compared to a blast furnace which operates at around 1500ºC. – Synergy: ECT also enjoys cost synergy between the processes – the Coldry process is used to combine the required ingredients to form the feedstock for the Matmor process (replacing expensive coking coal). – Low capital cost: Both Coldry and Matmor plants have lower capital intensity compared to the current processes. The modular nature of the project makes setting the plants easier, as the capacity can be easily upgraded as needed based on customer requirements, instead of a one- time commitment for a large capacity. Matmor is relatively simpler and more efficient as it requires low energy and has low construction cost relative to conventional processes. – Lower feedstock costs, achieved through the technologies’ ability to utilize low value raw materials. 100% ownership of IP of technologies: Along with patents to technologies, ECT has also secured its Intellectual Property (IP) rights for both technologies in almost all the major markets. The company’s Coldry and Matmor intellectual property will be licensed to the India project. Environmental adherence: The company’s technologies are environment-friendly, and application of the Coldry products to power generation is able to reduce CO2 emissions by about 5%-30% and also reduce other environmental effects. The Coldry process itself has a zero-carbon footprint and the Matmor process has the potential to reduce CO2 emissions from crude steel production by more than 25%. Supply of Coldry Pellets in Victorian Market: ECT will be supplying cost effective Coldry Pellets in the Victorian market. The increasing demand for an alternative fuel in the steam and hot water boiler market, on account of increasing natural gas costs, provided an opportunity to supply solid fuel. Partnership with PSUs to reduce execution risk: To capitalize on the opportunity in India, ECT has signed a tripartite binding agreement with two public sector undertakings (PSUs) – NLC India Limited (NLC) and NMDC Limited (NMDC). NLC is the custodian of lignite reserves in India; NMDC is India’s largest iron ore mining company. Both these firms are government-controlled firms, which brings a lot more credibility to the tie-ups. India, an ideal project location: The Company’s technologies of creating solutions for value-addition to low-grade coal gels well with the significant demand for coal and steel in India owing to its increasing infrastructure and power needs. India is estimated to have reserves of about 43 BT of lignite, of which 80% is found in the state of Tamil Nadu, where the company is setting up its first project. In April 2016, the World Steel Association projected India’s domestic steel demand to grow 5.4% to 83.8Mtpa in 2016, and further to 88.3Mtpa by 2017. To meet the demand in the medium term, more than 200Mtpa capacity growth is required over the coming decades - which, with current technologies - would require a significant import of high-quality coking coal and other materials. Through the application of ECT’s Coldry and Matmor technologies, significant capital cost savings for capacity addition is possible. Further, significant savings on the importation of high-cost, overseas sourced coking coals could be avoided, thus boosting the growth momentum within India’s economy. India would likely become the world’s fastest growing economy, as it is implementing the ‘open for business’ mantra and pursuing the ‘Make in India’ initiative on a wider scale. India is currently one of the top five producers and consumer of coal and iron/steel. While India’s coal-based energy production is projected to double by 2030, India’s steel consumption rate is expected to grow the highest in world at 7.3% in 2016.
Environmental Clean Technologies – Arrowhead BID 5 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
India’s Lignite Reserves (April 2013)vi Global Steel Consumption Lignite Reserve % Of State (MMT) Total Tamil Nadu 34,348 79% Rajasthan 5,690 13% Gujarat 2,722 6% Pondicherry 417 1% J&K 28 0% Kerala 10 0% W. Bengal 3 0%
Total 43,216 100%
Company’s Portfolio and Risks Technological Risk: The company faces technological risks with respect to full commercial exploitation of the technology as well as the possibility of better competing technologies in future. While promising, Coldry and Matmor technologies are yet to be commercialized at large scale and a degree of uncertainty is inherent until they become fully operational. The company is planning a demonstration plant for Coldry, whereas Matmor is in the pilot stage and would be fully developed after the roll-out of Coldry. Matmor dependent on Coldry: The Matmor process uses the Coldry process to prepare its key inputs, and hence, the success of Matmor is critically dependent on the success of the Coldry project. Nascent stage of the life cycle: ECT is a relatively new company with no operational revenues and cash flows, and hence, is exposed to financial and execution risk. Regulatory/Political risk: The company could face risks due to changes in government legislation/policies, and political unrest in the region/country. Price and rate risk: ECT’s potential revenues will be exposed to both commodity prices and exchange parity. Though ECT has formed a subsidiary in India to carry out Indian operations, there might be exchange parity when consolidating the results with the Australian parent company.
Company’s Corporate Strategy Focus on India project: ECT has currently zeroed in on India for the launch and global commercial rollout of its technologies. It aims to start off operations first in India due to the underlying demographics leading to economic potential, coupled with huge lignite reserves and expected rising demand. The company has completed the TEF study and commenced the project’s engineering phase. ECT is focused on delivering a detailed design of the Indian project, followed by the construction of the demonstration plant. The company has upgraded its Bacchus Marsh R&D facility. ECT will commence first with Coldry technology and then work up to completion of the Matmor project. This will de-risk any aspect of the Coldry process, which will eventually be a part of the Matmor process as a feed control. Bacchus Marsh High-volume Test Facility: ECT is offering cost effective Coldry Pellets for use in steam and hot water boiler systems across Victoria. ECT has upgraded the Bacchus Marsh Coldry Pilot plant to expand its capacity to 15KTpa. ECT furthers targets to increase the capacity to 35KTpa. The company is currently negotiating commercial offtake agreements with multiple parties. The supply of Coldry Pellets has come as a huge positive for the company as it will support the company’s Indian operations.
Geographic expansion: ECT plans to focus on the Australian Coldry project, as well as other target geographies, including: Coldry: Germany, East European countries (Poland, Serbia, etc.), Turkey, Indonesia, Thailand and China, according to the low rank coal availability. Matmor: Australia, Indonesia, China, USA and Poland, based on combinations of steel market, raw material availability, and strategic need.
Environmental Clean Technologies – Arrowhead BID 6 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
News – Establishment of ECT Finance Ltd and Sales strategy of Coldry solid fuel in Victoria: On June 23, 2017, the company announced that it established a Special purpose entity, ECT Finance Ltd., to support the financing decisions of the parent company. The company also built a website for ECT Finance Ltd. to invite the registrations for ELF before the official opening of the application. ECT also announced that it has commenced negotiations with multiple parties to supply a cost effective solid fuel Coldry Pellets for use in steam and hot water boiler systems across Victoria. ECT is currently upgrading its high-volume test facility (HVTF) to further expand its capacity. Once the offtake agreements are secured, it would ensure supply of solid fuel pellets for their entire capacities. – Limited Tender Offer – India Project: On May 29, 2017, the company acknowledged that NLC has announced a limited tender for review of financial and structural aspects under the Master Project Agreement. ECT also announced the equity sharing in ECT India, a wholly owned subsidiary of ECT. It is proposed that 25% of the equity in ECT India will be distributed to NLC and NMDC such that they hold 12.5% each, with ECT retaining 75%. The company will also establish a Special Purpose Vehicle (SPV) Company as a wholly owned subsidiary of ECT India. – India Project Update: On May 19, 2017, the company announced that ECT personnel would reach India soon to assist the review process by NITI Aayog and seek guidance on the timeframe of completion. The company also announced that it had gathered valuable data through the R&D program at the High Volume Test Facility, leading to further refinement of the design specification process and significant capital cost saving through improved drying efficiencies. The company also announced the commencement of boiler trail at a large commercial facility in western Victoria to test Coldry product suitability. – Equity Lending Facility – Update: On April 28, 2017, the company decided, based on its due diligence and review process, to proceed with the Equity Lending program. The company is working on preparatory work such as loan documentation and establishment of program management systems. The company also announced that it withdrew its proposal to pay the interest on loan and would not encourage conversion via the EFH facility looking at the development in ELF. On April 28, 2017, the company announced that Mr. Glenn Fozard had agreed to serve full-time and would manage ECT Finance and lead the company’s Business Development function. – ECT, NLC and NMDC enter into an interim agreement: On April 18, 2017, the company announced that it had started commercial preparation activities, given the longer-than-expected time on review process by NITI Aayog. These activities will include legal, planning, financial and procedural aspects for the project execution. NLC and NMDC will directly fund these activities, while ECT will provide guidance as required. Also ECT, NLC and NMDC entered into an interim agreement with respect to funding and execution of Coldry-Matmor projects and commencement of construction after review by NITI Aayog. – Testing and Product sale from Bacchus Marsh Plant: On March 9, 2017, ECT announced that it had been exploring the market with Coldry products for small and large boiler systems. The company recognized its first sales in FY16/17 from the product output of the R&D facility. ECT expects to generate additional 5,000-15,000 tonnes per annum for FY17/18 and plans to expand its capacity to 30,000 tonnes per annum. The company is in talks with local customers to enter into an offtake agreement. – Equity Lending Facility Update and setting up ‘ECT Finance’: On March 3, 2017, the company announced that the advanced overseas ruling received in relation to Coldry will have an estimated cash value benefit of AU$10MM in its future tax incentive refunds. In relation to the Equity Lending Facility (ELF), the company has modified some of its proposed features. It is finalizing documents to present before the extraordinary general meeting to be held in May. The company also announced its plan to set up a wholly owned subsidiary, ECT Finance, to support financing and lending activities of the parent company. – Indian Master Project Agreement under review by NITI Aayog: On February 21, 2017, ECT announced that the commercial terms submitted to NLC and NMDC for legal review had been approved
Environmental Clean Technologies – Arrowhead BID 7 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
without any significant amendments. Taking into account the contribution of ECT technology to environmental commitment under the Paris climate agreement, the project will be placed before NITI Aayog for review against the national strategic plan prior to board approval and execution. Meanwhile, ECT and NLC have agreed to start site preparations in Neyveli. – Positive results of Coldry ‘Advanced Finding and Overseas Ruling’ application: On February 21, 2017, ECT announced that the Australian Federal Government AusIndustry agency had approved the company’s application for an ‘Advanced Finding and Overseas Ruling’ in relation to its Coldry R&D Project in India, meeting one of the conditions in the debt facility agreement with Brevet. The other precedent is subject to finalization of the Master Project Agreement with NLC India Ltd and NMDC Ltd. The Matmor Ruling application is likely to be submitted by March end. – Equity Lending Facility: On February 20, 2017, ECT announced that it had considered the option funding facility, which would be open for all ESIOA and ESIOB option holders to finance the conversion into Fully Paid Ordinary Shares as a part of the broader ECT Capital Management Program. This offer application period will expire on July 31, 2017. – India Project – Update: On January 16, 2017, ECT announced that the commercial terms of the Master Project Agreement had been submitted to NLC India Limited (NLC) and NMDC Limited (NMDC) for legal review. Construction is expected to be completed in 9 to 12 months after the designing phase. – Bacchus Marsh High Volume Test Facility completed: On December 16, 2016 ECT announced the completion of its Bacchus Marsh High Volume Test Facility which has doubled its previous capacity to 15 KTpa along with reduced running costs of the detailed R&D test run program. – India Project Funding Strategy: On December 22, 2016, ECT announced that it has entered into a financing arrangement with Equities First Holdings for $3-5MM and expects to realize up to $1.5MM, of the targeted $3MM. Subject to market environment, the program may be expanded to $5M. Also, ECT has signed a term sheet with Brevet Capital Advisers LLC to fund the proposed Indian project, in partnership with NLC and NMDC, for an estimated $10MM. – Commencement of engineering phase of integrated Coldry-Matmor facility: On December 9, 2016, ECT announced initiation of project engineering for the integrated Coldry-Matmor facility in India. Currently, ECT is coordinating with Thermax and MN Dastur, engineering service providers, for Coldry and Matmor, respectively, to finalise on the scope, budget and timeline of the project. To provide guidance and support for the completion of the program, the partners are forming a steering committee. – Submitted Patent Application for HydroMOR technology: On November 24, 2016, ECT announced that it has filed for a new Australian provisional patent for its HydroMOR technology. HydroMOR—an improvement over the Matmor process—utilizes hydrogen to efficiently extract metal oxide from Ore, thereby further reducing capital and operating cost of the project. This frugal innovation is a significant step towards a zero-emission future. – Shareholder update on Indian activity & Bacchus Marsh R&D: On October 21, 2016, ECT informed that the discussion regarding financing and constructing the Coldry and Matmor pilot plant was underway. ECT, NLC and NMDC agreed to contribute equally towards the project. Based on the recent structural changes in the energy market, ECT revisited the TEF study. The study concluded that ECT Matmor’s technology performs better against the negative effects of input prices, as compared with the traditional method. ECT also informed that significant progression was made in the Bacchus Marsh Coldry Pilot plant upgrade. This upgrade, once completed, will deliver a High Volume Test Facility and will improve the company’s R&D facility.
Environmental Clean Technologies – Arrowhead BID 8 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
– TEF study completed: On July 1, 2016, ECT announced the completion of the TEF study for its India Integrated plant. The results were encouraging for the advancement of the Coldry demonstration plant and Matmor pilot plant. The TEF study lays down the technical and the economic performance of the technologies along with the financial parameters. Further, the company is planning to prepare a detailed design program to finalize the funding, project execution and ownership structures of the plant.
– Capital management activities: On April 28, 2016, ECT announced the repayment of ‘Fast Finance Follow-on’ loan facility. The company had only withdrawn $300k out of $1.2MM loan facility. On May 20, 2016, the company raised $1MM under the funding agreement with Brevet Capital. The loan facility is secured against future AusIndustry R&D Tax Incentive rebates. The funds will be used towards continued project work in India, upgrade activities at the Bacchus Marsh test facility and general working capital needs. On August 24, 2016, ECT announced that it has extended the FY 2016 R&D Facility for additional drawdown under Brevet loan facility. The company also established FY 2017 R&D loan facility with improved terms to support further operations.
– General update on Indian activity and other current activities: On March 14, 2016, ECT announced the progression on Techno-Economic Feasibility study, and is on track to be completed in June 2016. The ECT conducts the study, supported by Thermax and MN Dastur, in collaboration with NLC and NMDC. ECT also announced the exercise of 32.8MM ESIOB listed options by Calleja Group into fully paid ordinary shares, demonstrating commitment and confidence in Coldry and Matmor projects. – Funding Agreement with Innovation Structured Finance Co.: On February 2, 2016, the company finalized a loan facility agreement with Innovation Structured Finance Co., a U.S.-based specialty finance company founded by Brevet Capital. The senior secured loan agreement, (Brevet facility) provides further scope for large, non-dilutive project financing based on Australia’s R&D Tax Incentive Program, apart from providing a short-term draw-down facility against ECT’s FY2016 accrued R&D Tax Incentive refund (amounting to more than US$1.2MM). Through the capital management plan, ECT has lowered its short-term capital raising requirements and is set to comfortably meet near-term funding requirements for its projects in India and Australia.
Environmental Clean Technologies – Arrowhead BID 9 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Listing Information Environmental Clean Technologies Limited is listed on the Australian Securities Exchange (ASX: ESI) since 2006 and is headquartered in Victoria, Australia.
Contacts
Registered office 388 Punt Rd, South Yarra, Victoria 3141, Australia Telephone +613 9849 6203 E-mail [email protected]
Major Shareholders
Equity Holder No. of Shares Held (Million) Percentage Holding
LJ & K Thomson Pty Ltd. 193.2 6.34 Iain McEwin / Superior Coatings Pty Ltd. 149.1 4.89 Elgar Park Pty Ltd. 111.0 3.64 Menzies Super Pty Ltd. 74.6 2.45 Maddingley Brown Coal Pty Ltd. 63.3 2.08 Challenge Roofing Pty Ltd. 46.0 1.51 Source: Top 40 Shareholders as at 30 June 2017vii
Environmental Clean Technologies – Arrowhead BID 10 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Management and Governance
Personnel Designation Current and total Experience
Glenn Fozard was appointed Chairman of the company in November 2013. He has held an advisory position in the company for over five years and has been instrumental in capital-raising exercises. Mr. Fozard has a significant experience spanning over 13 years in the finance sector. He is the founding member of Glenn Chairman Greenard Willing, a specialist financial advisory firm. Prior to his role with the Fozard company, Mr. Fozard held the position of Director with Trafalgar Community Bank in the Risk and Audit division. He worked with Maquarie Bank Limited for five years and held various senior manangement and sales roles. Mr. Fozard will also manage ECT Finance and lead the Company’s Business Development function Ashley Managing Ashley Moore has been a part of the company since 2009. He held the position of Moore Director COO, Executive Director (2011-2013) before becoming the Managing Director (2013-Present). He is an industry veteran in Manufacturing, Supply Chain, Sales and Industrial Marketing and has a global experience in all the fields. Previously, he has worked with Cabot Corporation and Delta EMD (Pty) Limited. David Smith Non-Executive David Smith joined the company as Director in February 2015. Prior to that he has Director worked with Herbert Smith and Corrs Chambers Westgarth. At present, he holds the position of Vice President in Bicycle Network and is a Partner at Gadens law firm. Mr. Smith has a strong legal and commercial background spanning 24 years and has an extensive Intellectual Property experience. He is a member of the Intellectual Property Society of Australia and New Zealand and the Licensing Executives Society. Mr. Smith has helped companies with IP agreements development, licensing, collaborative research agreements and international negotiations. He holds a degree in B.Com and LLB (Hons.) from the University of Melbourne. Barry Non-Executive Barry Richards has a significant industry and commercial background of about 30 Richards Director years. He asists companies by providing practical experience in major project development and delivery apart from providing expertise in contract, operational and maintenance stages of a project. He currently holds the position of Managing Director with Mercus Pty Ltd, and previously was a part of Operations and Maintenance Management with the State Electricity Commision of Victoria. He also held Contract and Business Development role with Siemens/ Silcar. Adam Giles Corporate Adam Giles has been a part of the company since 2005. His long-term involvement Communications with the company and consequently, with the Coldry and Matmor technologies, & Company has helped him provide a strategic assistance to the company. He has about 20 Secretary years of management experience across public and private sectors. Prior to joining the company, Mr. Giles held the position of Manager at Caracob Pty Limited and was the Contact Centre Manager for Tenix Solutions.
Environmental Clean Technologies – Arrowhead BID 11 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Proprietary Technologies and Key Project
Overview ECT holds 100% intellectual property rights in Coldry, which produces high-grade coal equivalents from low-grade coal, and Matmor, which produces primary iron using the Coldry product in lieu of expensive coking coal. Indian Integrated Project: ECT is currently focusing on its Indian Project, to be set up along with two Indian PSUs. ECT, along with its project partners, is currently involved in the execution of the Master Project Agreement detailing commercial and legal framework of the project. Currently, the project is under the review of the National Institution for the Transformation of India Committee (NITI Aayog), with ECT, NLC and NMDC assisting the review process. Once the MPA is signed, construction is likely to start and last for 9-12 months after the designing phase. In addition to this, the company has commenced the basic engineering phase of the Indian Integrated project and are now finalizing the project scope, budget, timelines and detailed design of the integrated facility. Bacchus Marsh High-volume Test facility (HVTF): ECT will supply the cost effective Coldry Pellets for use in steam and hot water boiler systems in the Victorian markets. Currently, the company is performing further tests and upgrades at the HVTF. Moreover, ECT is negotiating long-term offtake agreements with multiple parties. The company expects to sell the Coldry Pellets in nearby markets in Victoria.
Company’s Technological and Project Portfolio Business Model Project overview
Primary Technologies
• Coldry • 100% IP ownership • Key Product – Black Coal Equivalent pellets • Markets – EU, Germany, Turkey, China, Southeast Asia
• Matmor • 100% IP ownership • Key Product – Customized Iron Product • Markets – Australia, China, USA, Poland, Indonesia
Key Project
• Indian Integrated Project • 33% share. remaining share held by project partners – NLC and NMDC • Integrated plant (Coldry + Matmor) • Current status - Commenced engineering phase of Coldry-Matmor plant project followed by construction of Coldry Demonstration and Matmor Pilot Plant
• Bacchus Marsh High Volume Test facility • R&D test facility in Vicotria
• Supply of cost effective solid fuel Coldry Pellets • Current Status - Stage 3 of the upgrade in process, In negotiation with multiple parties to secure offtake agreements Source: Company filings Source: Company filings
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Lower moisture content: The Coldry product has Coldry – Technology and Process ~85% lower moisture content compared to the input (lignite). IP Ownership: 100% Moisture reduction Primary Output: Black Coal Equivalent pellets Primary Raw Material: Low-grade coal USP: Cost-effective, high-value process Summary: Coldry is an efficient pre-drying process, which produces high-value coal pellets from low-grade coal varieties such as lignite. The process involves full utilization of waste heat, which further reduces processing costs. The technology is modular, and the capacity can be expanded as needed, providing greater flexibility Source: Corporate presentation, Sept 2015 in implementation and plant set-up. The Coldry product is a stable product which has Reduced CO2 emissions: The process enables high energy content and lower moisture content, reduced CO2 emissions in power generation by equivalent to black coal. Further, the product can 5%-15%. Further reductions are possible when be easily stored and transported and has lower implementing combustion systems upgrades. carbon emissions. Margins: Coldry technology could potentially The Coldry technology is a one-of-a kind process, generate higher margins due to its cost and potentially opens up new opportunities for effectiveness compared to peers. The Coldry owners of low-grade coal assets owing to its wide process has a low processing cost of US$7.2/T variety of applications. ECT is targeting mines and (excl. cost of raw coal), and benefits from: power stations owners to commercialize the Lower Opex: Due to low temperature (400C) project, as the technology could be easily and pressure involved in the process integrated with existing plants. Cost comparison with competitors IP Rights: ECT acquired IP of Coldry technology in June 2009 from Calleja group. Currently, ECT holds patents to Coldry technology in almost all major economies – Australia, Canada, China, Europe, New Zealand, USA and India. Acquisition terms: The IP was acquired from Calleja for a consideration of AUD$1MM, along with 55MM shares and 110MM options. Key Features: The Coldry product is a high-value, stable product which is ideal for storage and transportation. Generated from low-grade coal, the product could be deployed for all the applications suitable for high grade coals. Source: Corporate Presentation, Sept 2015 Enhanced net energy content: The Coldry product has a significantly higher energy content compared Modular design leading to easy integration: to the low-grade coal – with the energy content The process is simple and mechanical and can increasing by up to 285% (compared to lignite with be deployed in modules, making it suitable for 60% moisture content). remote installations and easier integration with existing coal mines.
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Coldry – Sample Plant Extruding: The coal paste is extruded into coal pellets. Conditioning: The extruded coal pellets undergo warm air of around 40ºC toughening on a conditioning conveyer wherein the pellet strength is increased before they are discharged to the main dryer. Continuous Packed Pad Drying: The moist pellets are subjected to further drying up of moisture and further strengthening in a pack bed dryer at low temperature via waste heat. Water Recovery: Water removed from coal can Source: Corporate Presentation, Sept 2015 be recovered from the process (optional) Coldry – Process Overview: Coldry is a cost- Coldry Pellets: The final products of black coal effective process to upgrade low grade coal (brown equivalent in the form of high energy Coldry coal, with high moisture content and low calorific pellets are ready for use/ transport. The dry value) into black coal equivalent (with low Coldry pellets are usually 16mm in diameter moisture content and high calorific value). and 45 mm in length. They have density of 700-750 kg/m3 with moisture content of The process can generate stable coal pellets output approximately 12% and energy content of HHV through: 23.1 GJ/T (5521 kcal/kg). Brown coal Densification: A process that destroys the internal porous structure and Product types: Three different grades of pellets mobilizes structurally-trapped water to prevent are extruded through the Coldry process, namely, moisture re-absorption Gateway, Domestic and Export – with varying Waste Heat utilization: Using waste heat from degrees of toughness: an industrial facility or power plant at a low temperature (~400C) to remove moisture. Product Types Conversion from Raw Coal to Coldry: The Coldry process involves the following steps:
Coldry Process
Source: Annual Report, October 2015 Gateway: Most basic version of the product, used for front-end feedstock. Domestic: Standard Coldry product, can Source: Corporate Presentation, Sept 2015 withstand handling and transportation in local markets with minimal generation of fines. Screening & Feed Control: Milled raw coal is Export: Premium grade, can withstand multiple screened before it goes to the feeder, to ensure handling points over long distances. a uniform size (<8mm). A small quantity of water is added to the feeder along with the Coldry Overseas Ruling Application: ECT has coal. received approval from the Australian Federal Government AusIndustry agency for an ‘Advance Shear & Attrition: The raw coal is subjected to Finding and Overseas Ruling’ application in relation mechanical shear in a mill attritioner where to its Coldry R&D Project in India. The company coal particles are reduced further into a coal can receive rebates under the AusIndustry R&D paste. Water inside the coal, both chemically Tax Incentive Scheme for overseas R&D activities trapped and physically absorbed into the coal as well. structure is released during the process.
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Potential clients and applications: The Coldry grade ores which are not suitable for the blast process provides a low-cost alternative to coal furnace based process. drying – the product can be used in a variety of Matmor iron is expected to be a supplement/ applications encompassing various stakeholders, substitute to scrap metal feedstock employed in including: Electric Arc or Induction Furnaces. The company is Stakeholders Application currently focusing on advancing the process to Pilot Plant stage with a capacity of 8KTpa. - Lower coal demand by operating on a blended IP Rights: ECT acquired IP of Matmor technology Brown Coal energy source from Calleja group in December 2014 for a Power Plants - Lower water losses, and consideration of AUD$4.5MM in equity and cash. recovery of high-quality Matmor – Process Overview: Matmor is a cost- water for boiler feedwater effective process to produce solid iron. The process - Higher energy security has the unique feature of using low-grade brown Black Coal - Have more flexibility over coal as the reducing agent. Power Plants input costs Matmor Process - Have multiple applications than traditional ones for Owners of brown coal Brown Coal - The new, value-added Assets applications have the potential to generate higher margins - Additional commodity for Coal Traders trade
- Lower the cost of Coal Chemical dewatering Plants - Retains important volatile Source: Corporate Presentation, Sept 2015 matter Key Steps: Current Status: ECT has applied a systematic Pellet Production: The extruded mixture of iron research and development process at the pilot ore and lignite from Coldry process is hardened scale to update the modular design of Coldry plant. and evaporated moisture is removed. Processing in Matmor retort: The inputs are fed Matmor – Technology and Process into the Matmor retort, wherein the remaining moisture is removed. The process uses coal as IP Ownership: 100% combustible gas – these are ignited at the base Primary Output: Primary Iron of the retort. The pellets are discharged at the base of the retort, containing carbon along with Primary Raw Material: Iron oxide (including in iron and ash. the form of fines), Coldry product (conversion of Producing liquid metal: The pellets are run low-grade coal through Coldry process) through hot air to produce liquid metal and USP: Low-cost alternative slag. The liquid metal is then poured to an induction furnace where billets are produced as Summary: Matmor is a low cost, low emission per customer’s requirements. process to produce primary iron from various iron oxides. The process has a simple design, and is Key Features: Compared to the conventional cost-effective compared to the traditional blast route of making iron through the blast furnace, furnace owing to the lower cost of feedstock. Matmor benefits from the lower operating costs, lower capital costs and lower emissions. In the Matmor process, the expensive coking coal is replaced by output from the Coldry process. Low opex due to low-grade coal as feed: Further, the project can be used to process a wide Matmor process uses lower grade coal, whose range of iron oxide feed – from using fines and low- prices are significantly lower than the
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expensive coking coal used in traditional iron Matmor Test Plant ore making process through blast furnace. Lower cost iron ore feedstock also contributes to this advantage. Lower Capex due to Simple Design: Capital requirements are estimated to be less than half of a traditional blast of equal capacity as the former requires smaller foot print and lower temperature materials for construction. Lower emissions: Apart from lower capital and production costs, Matmor produces high quality iron consistently with lower emissions and integrates well with existing downstream steel making. Comparison of Matmor wrt competing technologies
Source: Corporate Presentation, Sept 2015
Pilot Plant: Following the completion of Stage 2 test plant, the company aims to advance the Source: Corporate Presentation, Sept 2015 project to pilot plant scale, with an estimated Matmor Products: The Matmor products have capacity of 8 KTpa (1T/ hour). low iron content (>95%). Further, the product Matmor Overseas Ruling Application: ECT is could be customized based on customer working towards the application for an ‘Advance requirements to the following: Finding and Overseas Ruling’ to the Matmor DRI pellet component of the India project. If approved by the HLM (Hot Liquid Metal) AusIndustry, the company will benefit up to AUD Solid iron 5MM in future tax incentive refunds. The company is confident that the Matmor project is compliant Project Stage: ECT is currently developing with the R&D Tax Incentive legislation. Matmor Test Plant in Melbourne, which it aims to develop to pilot plant stage. Emerging Technology Solutions: ECT is also focusing its “Frugal Innovation” approach, which Test Plant: The test plant has a capacity of 1T/day targets emerging technology solutions. or 40kg/hour. ECT has upgraded the automation and feed and discharge systems at the Matmor test plant. With this improvement, ECT can now HydroMOR (Hydrogen Metal Oxide perform continuous testing. The company has also Reduction) – H2 made changes to allow trials of new techniques On November 24, 2016, ECT received the new associated with Matmor and HydroMOR. Australian Provisional Patent on the HydroMOR technology, which aims at utilizing hydrogen extracted from hydrocarbon-rich low rank coals for the reduction of metal oxides. This is an upgrade to the existing Matmor process.
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Proposed benefits of HydroMOR technology growing energy and infrastructure requirements in the region, coupled with the need for cost-effective production of power and iron. ECT has signed an agreement with NLC and NMDC Ltd and has established a collaborative framework to execute Reduction in Improve the ability to Exposure for ECT to capital and monetize the apply globally for an integrated Coldry and Matmor facility. operating cost intellectual property protection On July 1, 2016, the tripartite working group, with the collaboration of Thermax and MN Dastur, Reduction in CO 2 Opportunities to completed the TEF study report. The report emissions - to come demonstrate its closer to carbon improved capabilities highlights the benefits of ECT’s technology over the emissions neutral stell in new projects production traditional technologies, along with the technical, economic and financial parameters of the project.
ECT, along with its project partners, is involved in the execution of the Master Project Agreement Source: Company filings detailing the commercial and legal framework of the project. The Master Project Agreement (MPA) High – Value metal products (Ni) is approved by all the parties. Historically, Matmor and HyrdoMOR research has Taking into account the contribution of the project focused primarily on iron oxide reduction. Limited to India and its environmental commitment under testing has previously been performed on ores the Paris climate agreement, the project is placed containing higher value metal oxides such as before NITI Aayog (National Institution for the nickel, chrome, cobalt, manganese and titanium Transformation of India Committee) for review with promising results. The company has against the national strategic plan. ECT, NLC and commenced preparations to expand its NMDC are working together to assist the review fundamental R&D program to include further process by NITI Aayog. Once the project is testing of these potentially higher value approved by NITI Aayog, the parties will sign the applications. Master Project Agreement. Meanwhile, ECT and NLC have agreed to start site Carbon-neutral steel plants (Zero CO2) preparations in Neyveli. As a result of longer-than- expected timeframe for completion of review, ECT, As a result of the expected lower CO2 intensity, NLC and NMDC entered into an interim agreement capital and operational cost of Matmor and detailing: HydroMOR compared to blast furnace steel making, ECT is exploring the incorporation of Confirmation of continued interest by partners carbon offset strategies to achieve a zero CO2 steel process. Construction of the plant after review by NITI Aayog Indian Integrated Project Continuity Tripartite Collaboration Agreement Signing of the MPA and commercial project Company’s interest in the Project: 33% funding Technologies Involved: Coldry and Matmor Alongside, NLC and NMDC have started Location: Neyveli, Tamil Nadu, India commercial preparation activities, including legal, planning, financial and procedural aspects of the Current Stage: The Master Project Agreement project. A total budget of AUD 700,000 is has been approved by NLC and NMDC without estimated for these activities and will be jointly significant amendments. The project is under the funded by NLC and NMDC, while ECT will provide review by the NITI Aayog ahead of the final Board the necessary guidance. approval. The signing of the MPA date is to be fixed after board review and approval. The turnaround Earlier, the tripartite parties also reviewed the time for construction of 9-12 months is expected proposed location for the integrated plant. The after the completion of the designing stage. location, adjacent to power station and coal supply, is ideal being closely located to rail, road Summary: ECT is developing an integrated Coldry and other supporting site service. and Matmor project in India to capitalize on the
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Proposed site for development and future High level scope for engineering partners expansion of the project
Source: Shareholder’s Update, Aug 2016
The company appointed Yes Bank and Greenard Source: Shareholder’s Update, Dec 2016 Willing India to support its Indian operations. They assisted ECT in the signing of tripartite agreement A part of the output of the Coldry plant will be used and are expected to support ECT with a broad for the production through Matmor, while the range of corporate advisory functions. On March remaining output is expected to be sold to the local 14, 2016, ECT issued 1MM ordinary shares to Yes market. NLC, NMDC and ECT will contribute equally bank at $0.02 against performance milestone of to the costs and receive an equal ownership of the $20,000. plant. ECT commenced the engineering activities of the Project Development Partners: The Company project wherein the tripartite parties are planning has partnered with two Indian PSUs – NLC and to form a steering committee for the guidance and NMDC – as its project development partners for support. The company is in discussion with the India project. Both PSUs enjoy the “Navaratna” service engineer partners, Thermax and MN Dastur status offered by the Indian government, which for Coldry and Matmor, respectively, for the gives them greater operational autonomy. project’s scope, budget and timelines. Neyveli Lignite Corporation (NLC): NLC is the Following are the major scope areas: project host and lead partner on Coldry. Founded in 1956, NLC is an Indian NLC will take lead of the site preparations, government-owned lignite mining and power planning and approvals on behalf of the generating company. It operates the largest project partners open-pit lignite mines in India, presently Thermax will take care of overall site mining 24MMT of lignite and operates power development and services, supplying plants with total capacity of 2,740 MW. utilities for the Integrated project, along National Mineral Development Corporation with the engineering and vendor (NMDC): Founded in 1958, NMDC is a state- development for proprietary equipment controlled mining company owned by the items for the Coldry plant Government of India and is under the MN Dastur will manage the detailed design administrative control of the ministry of steel. requirements for the Matmor pilot plant It is India’s largest producer and exporter of and its integration with the overall site. iron ore, producing about 30 MMT of iron ore from its three existing mines in India. ECT will ensure smooth execution and provide support with its specialist Project Status: Coldry Demonstration Plant: technology and equipment knowledge. With the completion of the TEF study, the company is now focusing to deliver a detailed design program for the construction of the demonstration plant. The company is focused on the execution of MPA, which will be signed after the review of NITI Aayog. Earlier in 2015, Thermax (engineering partner) created a commercial scale design for the standalone Coldry plant. ECT plans to incorporate
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a similar design after making a few operational Key financial matrix: Following are the key adjustments for its demonstration plant. highlights of the TEF study: The Coldry project is expected to initially C/M EAF@ DR commence with a demonstration plant of a BF C/M – + Item (INR crore) EAF** relatively smaller capacity to define and validate BOF** EAF@ * the business model and the key operational and Power financial metrics to its project patterns. Following Gen CAPEX 2,522 2,257 1,400 1,607 the successful demonstration, the plant would be ramped up to full capacity. Sales 1,264 1,372 1,307 1,307 Manuf. Expenses 969 1,187 1,085 1,002 Project Status – Matmor Pilot Plant: ECT has EBITDA 295 185 222 305 signed the tripartite agreement and has appointed EBITDA margin (%) 23% 13% 17% 23% MN Dastur as an engineering partner to assist the company in the development stage with ROI 12% 8% 16% 19% operational aspects and to support the test plant IRR (Ungeared) (%) 9.1% 5.0% 14.1% 17.2% upgrade works. Upgrading the pilot plant will IRR 30% Geared*(%) 7.7% 1.4% 14.3% NA address all areas of the plant’s operations, IRR 50% including pellet production, composition and Geared*(%) 5.9% -3.8% 14.6% NA physical characteristics, plant thermodynamics IRR 70% Geared*(%) 2.4% NA 15.0% NA and reduction chemistry. *Interest rate @ 11.25% for the time period of 22 years **Blast Furnace -Basic Oxygen Furnace + Power Gen Value additions of Bacchus Marsh HVTF ***Coal Based DRI - Electric Arc Furnace + Power Gen @Coldry/Matmor Electric Arc Furnace (no power gen) The TEF study was based on the average price from July 2015 to June 2016. During the period, prices of certain inputs were near their bottom and hence the results were conservative. Since then, the steel and energy markets have seen an upturn in raw material costs. These changes have emphasized the compelling advantage of Matmor’s ability to utilize alternative raw materials. The following are the major changes since the conclusion of the TEF study: Source: Corporate Presentation, Nov 2016 Steel production (essential ingredient for Blast Furnace) has more than doubled since July Techno-Economic Feasibility Study Prices of medium-high grade thermal coals (an ECT, together with its project partners, has input in power generation and some DRI) completed the TEF study. MN Dastur and Thermax processes have increased by more than 50% have contributed significantly in the study. The price of premium lump iron ore has A detailed comparison of ECT’s Coldry-Matmor increased by 20-25% technologies with the traditional process has been done in the report. The report highlights the Lignite prices are unchanged and iron ore fines operating and capital costs of the project and have increased by 10%. compares them with the blast furnace facility (BF) Based on the above changes, the revised and a coal-based direct reduced iron (DRI) plant. conclusion is as follows:
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C/M BF is increased by the addition of power generation DR C/M – EAF@+ Item (INR crore) facility. EAF*** EAF@ Power BOF** Gen To construct a power generation facility, it requires CAPEX 2,522 2,257 1,400 1,607 a huge initial investment cost, however the cost of Sales 1,330 1,448 1,376 1,376 buying power to run EAF would reduce
Manuf. Expenses 1347 1,309 1,105 1,022 significantly.
Gross Profit -17 139 271 354 Expertise and Resources: Below table summarizes IRR (Ungeared) the contribution by each of the partner: Negative 2.2% 17.5% 20.0% (%) IRR 30% Negative NA NA 22.1% Geared*(%) ECT NLC *Interest rate @ 11.25% for the time period of 22 years **Blast Furnace -Basic Oxygen Furnace + Power Gen Technology provider Lignite supply ***Coal Based DRI - Electric Arc Furnace + Power Gen @Coldry/Matmor Electric Arc Furnace (no power gen) Training Site & site services
Operating costs estimate: Coldry-Matmor Commissioning Water and Power technologies are cost-effective than the traditional supply Operations & process. The below table summarizes operational Maintenance support Project Funding cost estimates, excluding an in-house power generation facility: Project Funding Marketing & Selling Steel output MATMOR Item (INR crore) BF-BOF DR-EAF NMDC MN Dastur -EAF
Raw material cost 669 800 641 Iron Ore Engineering Design
Utilities & services 88 146 234 Project Funding Route Process Consumables & refractories 67 116 98 Evaluation Marketing & Selling Manpower 20 15 13 Steel output Economic Analysis
Repair & Maintenance 33 23 18 Thermax YES Bank Administrative & overheads 92 87 81 Project Management Project Advisory Annual production costs 969 1187 1085 Engineering Capital cost estimate: The capital cost estimates Procurement are based on the data of historical projects: Construction Capital cost estimate
INR Crore Commercialization Strategy 3000 2,522 ECT has an effective commercialization strategy in 2500 2,257 place for the implementation of products ideas to 2000 1,607 1,400 revenue generation. This includes related 1500 manufacturing, supply chain and R&D activities, 1000 followed by marketing and sales. 500 To make the Indian Integrated project a “revenue 0 BF-BOF DR-EAF MATMOR-EAF MATMOR-EAF model”, ECT is focusing on ‘Demonstration and + Power Gen Integration’, which will ensure successful operational activities and optimize economics. Source: TEF Study Report, Aug 2016 The following are the target revenue streams: A lower initial investment to construct Coldry- Technology IP License—royalties from Coldry Matmor technologies is one of the ECT’s primary and Matmor ($/tonne) advantages compared to the traditional process. The estimated capital cost for the Matmor project Detailed Design Services—delivered as part of the IP & project Management agreements
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OEM Services—delivered as part of Project setup an R&D facility and has conducted an initial management services scoping study, from which it has received positive feedback. ECT has assessed that its initial revenues would The company upgraded its existing test facility at be generated during the commercial Bacchus Marsh in Australia to provide higher demonstration. volume test capability. Previously, the company
successfully completed trials on small-scale boiler Project Schedule: ECT is now focusing to deliver a systems and recently completed successful trials detailed design program for the construction of the through a medium-sized boiler system. The results demonstration plant. This will be followed by were encouraging, with the Coldry Pellets meeting execution of an agreement, detailing about the key performance and compliance requirements. funding, project execution and ownership structures. The demand for an alternative sources of fuel used in the steam and hot water boiler market recently Corporate Milestones increased due to the increasing natural gas cost. 2018: Demo The demand, along with the expectations for 2016: Plant Operation further price increases in the coming years, Tri-partite India agreement & evaluation increased the rate of enquiries for Coldry products Project agreement in Victoria. Coldry (HVTF) Sales Strategy: 2019: Industrial Plant During FY16/17, ECT recorded its first revenue 2017: Project Start from the sales of Coldry products. The company Master Project Agreement plans to increase its capacity to 35KTpa. Demo Plant Construction The company is discussing financing options with multiple parties for contract negotiations and if successful, it would supply the solid fuel pellets up
to the full capacity at the Bacchus Marsh HVTF. The Project outline of major phases: company services long-term fixed price contracts for its customers, effectively hedging any further •Techno-economic Feasibility Study Report •Detail Design price increase. •Project structures & detailed commercial Future Plans: 2016 agreements •Intial R&D investments The company plans to test the medium boiler system R&D program in the next 3-4 months. If •Signing of MPA successful, the company will establish a •Construction Preparation commercial framework for future R&D product 2017 •Plant Financing and Construction output sales, including infrastructure requirements and supply chain logistics. Following outlines the details of upgrade plans: •Plant Commissioning, Operations and 2018 Validation
Bacchus Marsh HVTF - R&D Facility The facility will also help in:
Company’s interest: 100% testing new brown coals & market suitability Technologies Involved: Coldry R&D for Matmor, HydroMOR and Coldry enhancing feedstock supply capability to Summary: ECT is planning to construct an support the Matmor Test Plant validation integrated Coldry plant in Victoria, Australia, with improve the measurement & control of plant a capacity of more than 200KTpa to produce high- inputs, outputs and sequencing grade PCI coal from lignite. The company has
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The upgrade has provided ECT with a significant Process Flow of Bacchus Marsh HVTF - 2 reduction in cost of running these tests. In the long run, ECT plans to setup this facility as a knowledge and research center for continuous improvement of the Coldry and Matmor process.
Process Flow of Bacchus Marsh HVTF - 1
Source: Corporate Presentation, Nov 2016
Indonesia & European Integrated Industrial Plant
Source: Corporate Presentation, Nov 2016 Owing to large lignite reserves and the demand for steel, ECT plans to expand its Coldry and Matmor technologies in European and Indonesian markets. ECT expects to complete TEF study by FY 2019 in the Indonesian market, followed by the European TEF study in FY 2020.
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Commodities and Markets Overview
Production: Coal is produced across the world, Coal viii with Asia-Pacific accounting for about 71% of the total world production. According to BP Statistical Chemistry and Properties Review, China is a major producer of coal, producing about 48% of the world’s coal. Coal, a combustible black or black-brown colored sedimentary rock, mainly constitutes carbon and hydrocarbons. It also contains varying amounts of Top Coal Producers (FY2015) oxygen, nitrogen, sulfur, ash and moisture. Country Mn tonnes oil eq. % share Based on the amount of carbon content and heat China 1,827.0 48% producing ability, coal is classified into four types US 555.6 15% – peat, lignite, bituminous, and anthracite. India 283.9 7% Types of Coal and their Uses Australia 275.0 7% Indonesia 241.1 6% Russia 184.5 5% South Africa 142.9 4% Total World 3,830.1 100%
Demand: According to the BP Statistical Review of world energy – 2016, Asia-Pacific accounts for more than 73% of the total global consumption of coal; China alone contributed to 50% of the world’s consumption in FY15. Source: IFP Panorama, 2010 Top 5 Coal Consumers (FY2015)
Sources and Production Others Sources: Coal reserves are found all over the 22% world in swampy areas like forests, marshes, areas near oceans, peat bogs and lagoons. Out of an Russia estimated 892BT of proven coal reserves 2% worldwide, the biggest reserves are in the USA, Japan China Russia, China, Australia and India (constituting 3% 50% ~75% of total world’s reserves). India Coal reserves (FY2015) 11% US 300 12%
200 Source: BP statistical review of world energy 2016
100
Billion Tonnes Billion Applications: The energy derived out of coal is mainly from the solar energy trapped inside these 0 plants. Different types of coal have different uses. US Russia China Austrailia India Subbituminous and lignite Anthracite and bituminous Electricity Generation: About 40% of world-wide electricity is generated using steam/thermal coal. Source: BP statistical review of world energy 2016
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Steel and cement production: Coal alongside iron diluted acids. Commercially available iron is is used as raw materials in production of steel. It classified based on purity and the abundance of also acts as a source of heat producing energy to additives - wrought iron, cast iron, steel, etc. produce cement. Sources and Production Paper and Aluminum Industry: Coal is used by alumina refineries and paper manufacturers in Sources: The largest iron ore reserves are located large quantities as an energy resource. in Australia. Brazil has the second largest iron ore reserves in the world, followed by Russia, China Chemicals and Pharma Industry: Byproducts of and India. These five countries alone account for coal are used in the production of various about 71% of the world’s total iron ore reserves. chemicals and pharmaceuticals. Iron Ore reserves (FY 2015) Other uses: Coal has several other uses in all forms – in manufacturing of soap, fiber, rayon, cooking fuel etc. Australia Russia Market Trends: Prices and drivers Brazil Coal has always been a cheaper fuel as compared China to oil and gas. Due to its abundant supply and India relatively stable pricing, it is the most affordable choice of fuel in developing countries. 0 10000 20000 30000 40000 50000 60000 million Metric Tonnes Coal demand heavily depends on growth in the Crude Ore Iron Content power sector and industrialization. In FY15, total world coal production declined by 4.0%, whereas Source: US Geological Survey 2016 consumption fell by only 1.8%. USA recorded the largest decline in both coal production (-10.4%) and coal consumption (-12.7%). Production: According to data from the US Geological Survey, the top five iron ore producing Coal price trend in the last five years countries control approximately 85% of production and 73% of reserves. The largest producer of iron ore in the world is China, followed by Australia, Brazil, India, and Russia. Four companies dominate global iron ore production namely, BHP Billiton, Vale, Rio Tinto, and Fortescue Metals Group.
Iron Production (FY 2014)
Source:InfoMine.com
Iron ix
Chemistry and Properties
Iron (Fe), by mass, is the most abundant Source: US Geological Survey 2015 element on Earth, known to exist in various forms of iron ore such as hematite, magnetite, taconite, Demand: More than half of the demand for iron limonite, etc. It is a lustrous, ductile, malleable, and steel comes from China. However, Chinese silver-gray metal. Iron is chemically very active. consumption of iron and steel is declining due to It rusts in damp air and dissolves readily in slowdown in construction and manufacturing
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activity. Nevertheless, according to Rio Tinto, Different grades of iron are used in different global steel demand (main use of iron ore) is slated sectors. Wrought iron which is rust-resistant and to grow on an average 2.5% annually for the next can be molded very easily is widely used for 15 years. Emerging markets are expected to take making household things such as fencing, arbors, on an expanded role, with the mining company and furniture. Cast iron, which has a uniform predicting that non-Chinese steel demand will rise heating property, is used for manufacturing long 65% by 2030. lasting kitchen utensils, Dutch ovens, cake pans and cornbread trays. Metallic iron is used for Top 20 Iron Consumers (2013) making permanent and electro-magnets.
Market Trends: Prices and drivers Iron ore prices have been falling due to high supply and low demand. Companies are in fact increasing output to benefit from economies of scale as prices remain above their production costs. On the other hand, demand is under heavy pressure as construction activity slows in largest consumer China.
Commodity price trend 1985-2015
Figures in MMT Source: Ironorefacts.com
Applications
Iron is the most widely used of all metals. It is majorly used to manufacture steel. Its low cost and high strength make it indispensable in engineering applications such as the construction of machinery and machine tools, automobiles, the hulls of large ships, and structural components for buildings. Iron, along with other elements, is used in the construction of nuclear reactors, treatment of Source:Ironorefacts.com sewage systems, as a colorant, for textiles and paints, and animal feed additives.
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Value The fair market value for Environmental Clean Technologies Limited shares is between AUD104.3MM and AUD127.3MM. The fair market value of one of Environmental Clean Technologies Limited’s publicly traded shares is between AUD0.034 and AUD0.042.
Environmental Clean Technologies Limited Balance Sheet Forecast all figures in CONSOLIDATED BALANCE '000 AUD, unless SHEET Low bracket estimates stated differently
year ending June 30 2018E 2019E 2020E 2021E 2022E 2023E Total Current Assets 5,870 8,661 24,247 49,004 73,626 98,158 Total Non-Current Assets 37,489 52,598 50,088 48,247 46,855 45,764 TOTAL ASSETS 43,359 61,258 74,335 97,251 120,482 143,923 Total Current Liabilities 3,589 3,589 3,589 3,589 3,589 3,589 Total Non-current Liabilities 371 371 371 371 371 371 TOTAL LIABILITIES 3,960 3,960 3,960 3,960 3,960 3,960 Total Shareholders’ Equity 39,399 57,298 70,375 93,291 116,522 139,963 TOTAL LIABILITIES and EQUITY 43,359 61,258 74,335 97,251 120,482 143,923
Important information on Arrowhead methodology The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent, depending on the sub-sectors in which the research is conducted. But all Arrowhead valuation researches possess an underlying set of common principles and a generally common quantitative process. With Arrowhead commercial and technical due diligence, the company researches the fundamentals, assets and liabilities of a company, and builds estimates for revenue and expenditure over a coherently determined forecast period. Elements of past performance such as price/earnings ratio, indicated as applicable, are mainly for reference. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence.
Arrowhead BID Fair Market Value Bracket The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analyses such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a valuation tool. In principle, an investor comfortable with the high brackets of our key variable analysis will align with the high bracket in the Arrowhead Fair Value Bracket, and, likewise, in terms of low estimates. The investor will also note the company intangibles to analyze the strengths and weaknesses, and other essential company information. These intangibles serve as supplementary decision factors for adding or subtracting a premium in investor’s own analysis. The bracket should be taken as a tool by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand that while on the one hand global capital markets contain inefficiencies, especially in terms of information, on the other, corporations and their commercial and technical positions evolve rapidly. This present edition of the Arrowhead valuation is for a short to medium-term alignment analysis (one to twelve months). The reader should refer to important disclosures on page 29 of this report.
Environmental Clean Technologies – Arrowhead BID 26 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Information on the Environmental Clean Technologies Limited valuation Environmental Clean Technologies Valuation Methodology: The Arrowhead fair valuation for Environmental Clean Technologies is based on Discounted Cash Flow valuation method (DCF) for its Indian Integrated Project and Bacchus Marsh HVTF. We have separately forecasted the metrics for Coldry and Matmor projects to arrive at project-level valuations. This, adjusted for Cash and R&D tax incentive receivable, is used to arrive at Implied Equity Value for the company. Time Horizon: The Arrowhead fair valuation for Environmental Clean Technologies is based on a DCF method. As the company’s technologies could be re-used over time horizon, we have assumed a longer time horizon compared to other mining firms where we assume it till the Life-of Mine. While revenue is expected to ramp up significantly during the 2017-18, the later years are heavily discounted and have a marginal effect on valuation, which are included primarily to present a full project cycle situation. Underlying Business Plan: The company holds 100% IP of Coldry and Matmor technologies, and is aiming to commercialize these technologies with its first project – Indian Integrated Project. The Coldry plant is expected to be operational by CY2018, while Matmor pilot plant is expected to complete by mid- 2017. The company is also planning to supply Coldry Pellets in the Victorian Market. Currently the company is negotiating offtake agreements with multiple customers. Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 0%, representing the maturity, technology change and prospective competiveness in the business. Prudential Nature of Valuation: This Arrowhead Fair Value Bracket estimate is a relatively prudential estimate, as it discounts the eventuality of the company installation of any additional other than from its Indian Integrated Project and Bacchus Marsh HVTF plant.
Environmental Clean Technologies – Arrowhead BID 27 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Key variables in Environmental Clean Technologies’ revenue estimations We have based our valuation for ECT based on Coldry and Matmor plants to be installed in its Indian Integrated Project and the supply of Coldry Pellets in the Victorian Market. The company would generate revenue through fees from licensing its technologies, as well as margins from installation and maintenance of the plants. Further, we assume that the company would retain its ownership in the Indian Integrated Project, and thus, would get a share of profits based on its stake in the plants. We assume Indian Integrated project to have equal ownership by NLC, NMDC and ECT. We have also assumed that the company would be able to supply Coldry Pellets in the Victorian Market from FY18. Key Variables which are used to arrive at HIGH and LOW bracket estimates are as follows:
Variable 1 – Plant Capacity and Timelines HIGH BRACKET: We estimate Coldry would be fully operational by FY18 at a capacity of 250KTpa. We estimate that Matmor pilot plant (8 KTpa) would be completed within six months after Coldry (mid- 18), and would be ramped up to full capacity of ~200KTpa (estimated) by CY20. LOW BRACKET: We have discounted our estimates by 25KTpa to arrive at Low Bracket estimates.
Coldry Matmor Coldry Pellets (in KTpa) (CY18) (CY20) (CY18) Low 225 175 32 High 250 200 34
Variable 2 – Margins from Plant Operations HIGH BRACKET: We have estimated EBITDA margins of Coldry project in line with Company presentation. Given the early stages, margin details for Matmor plant not reported; we have estimated the margins of US$125/T for Matmor, based on its relative savings with respect to traditional blast furnace operations. LOW BRACKET: To arrive at Low Bracket estimates, we have discounted our estimates by US$5/T and US$25/T for Coldry and Matmor respectively.
(in US$/T) Coldry Matmor Low 30 100 High 35 125
Variable 3 – Capex We have estimated capex for Coldry plant and Matmor pilot plant in line with company’s estimates. For full-scale Matmor plant, we estimate capital costs of INR 1,400 crore for 500KTpa of billet steel in India, as per the TEF study.
Variable 4 – P/NPV Given the different stages of the Coldry and Matmor, we have discounted the NPV of these projects with P/NPV multiple to account for the inherent project risks, including the current stage and the timelines to bring the projects to commercialization. The P/NPV multiple, in conjunction with company’s interest in the project, is used to determine the implied equity value.
P/NPV multiple Coldry 0.80x Matmor 0.40x
Variable 5 – Exchange rate We have used a US$/AUD conversation rate of 1.33.
Environmental Clean Technologies – Arrowhead BID 28 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Analyst certifications
I, Shruti Gupta, certify that all of the views objectives and financial situation utilizing their own expressed in this research report accurately reflect financial advisors as they deem necessary. my personal views about the subject security and Investors are advised to gather and consult the subject company. multiple information sources before making investment decisions. Recipients of this report are I, Jay Thakkar, certify that all of the views strongly advised to read the information on expressed in this research report accurately reflect Arrowhead Methodology section of this report to my personal views about the subject security and understand if and how the Arrowhead Due the subject company. Diligence and Arrowhead Fair Value Bracket integrate alongside the rest of their stream of Important disclosures information and within their decision taking Arrowhead Business and Investment Decisions, process. LLC received fees in 2015-17 and will receive fees Past performance of securities described directly or in 2017 from Environmental Clean Technologies indirectly in this report should not be taken as an Limited for researching and drafting this report and indication or guarantee of future results. The price, for a series of other services to Environmental value of, and income from any of the financial Clean Technologies Limited, including distribution securities described in this report may rise as well of this report, investor relations and networking as fall, and may be affected by simple and complex services. The partners at Arrowhead Business and changes in economic, financial and political factors. Investment Decisions, LLC intend to seek a mandate for investment banking services from Should a security described in this report be Environmental Clean Technologies Limited within denominated in a currency other than the the next semester. investor’s home currency, a change in exchange rates may adversely affect the price of, value of, Aside from certain reports published on a periodic or income derived from the security. basis, the large majority of reports are published by Arrowhead BID at irregular intervals as This report is published solely for information appropriate in the analyst’s judgment. purposes, and is not to be considered as an offer to buy any security, in any state. Any opinions expressed in this report are statements of our judgment to this date and are Other than disclosures relating to Arrowhead subject to change without notice. Business and Investment Decisions, LLC, the information herein is based on sources we believe This report was prepared for general circulation to be reliable but is not guaranteed by us and does and does not provide investment not purport to be a complete statement or recommendations specific to individual investors. summary of the available data. As such, any of the financial or other money- management instruments linked to the company Arrowhead Business and Investment Decisions, and company valuation described in this report, LLC is not responsible for any loss, financial or hereafter referred to as “the securities”, may not other, directly or indirectly linked to any price be suitable for all investors. movement or absence of price movement of the securities described in this report. Investors must make their own investment decisions based upon their specific investment
Environmental Clean Technologies – Arrowhead BID 29 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Valuation WACC Risk-free rate 2.5% x Project Stage Capacity Margins Beta 0.6 xi Risk premium 6.5% xii Max
xiii value Additional Risk Premium 0.0% Please refer to the Key Variable Section Cost of Equity 6.7% Min Terminal Growth Rate 0.0% value
FCFE (High) Time Period --> 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E EBITDA 10,126 12,233 26,274 42,570 42,570 42,570 42,570 42,570 Tax (2,894) (1,887) (6,535) (11,904) (11,904) (11,904) (11,904) (11,904) Capital Expenditure (19,335) (18,618) ------Free Cash Flow (12,103) (8,272) 19,738 30,666 30,666 30,666 30,666 30,666 Present Value of FCF (11,347) (7,271) 16,266 23,694 22,214 20,826 19,526 18,306
FCFE (Low) Time Period --> 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E EBITDA 9,071 10,492 21,889 35,276 35,276 35,276 35,276 35,276 Tax (2,577) (1,503) (5,271) (9,671) (9,671) (9,671) (9,671) (9,671) Capital Expenditure (19,335) (18,618) ------Free Cash Flow (12,841) (9,629) 16,618 25,605 25,605 25,605 25,605 25,605 Present Value of FCF (12,039) (8,464) 13,695 19,783 18,548 17,389 16,303 15,285
In the model, the valuation is continued to the year 2028, from which point the terminal value is established.
Arrowhead Fair Value Bracket
in AUD ‘000, unless otherwise stated High Low Implied Enterprise value 124,618 101,655 +Cashxiv 2,639 2,639 Equity Value Bracket 127,258 104,294 Shares Outstanding (in millions)xv 3,046.8 3,046.8
Fair Value Bracket (AUD) 0.042 0.034 Current Market Price (AUD) 0.013 0.013
Environmental Clean Technologies – Arrowhead BID 30 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.
Notes and References i Arrowhead Business and Investment Decisions (ABID) Fair Value Bracket. See information on valuation on pages 26-30 of this report and important disclosures on page 29 of this report ii Bloomberg as on 11-July-2017 iii Bloomberg as on 11-July-2017 iv 3-month average volume from Bloomberg as on 11-July-2017 v Bloomberg as on 11-July-2017 vi Press information bureau, GoI vii http://www.ectltd.com.au/top-40-shareholders-as-at-30-june-2017/ viii World Coal Association – www.worldcoal.org BP Statistical Review of World Energy 2016 Infomine.com IFP Panorama, 2010 ix Ironorefacts.com US Geological Survey 2015 x Bloomberg as on 11-July-2017 xi Arrowhead Estimate xii Bloomberg as on 11-July-2017 xiii Arrowhead Estimate xiv Company’s cash and cash equivalents (incl. Research and development tax incentive receivable) as at 31st Dec 2016 xv Bloomberg as on 11-July-2017
Environmental Clean Technologies – Arrowhead BID 31 ASX:ESI Due Diligence and Valuation Report See important disclosures on page 29 of this report.