Environmental Clean Technologies
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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