LEAF RESOURCES LIMITED (LER)

Transcription

1 GORDON CAPITAL PTY LTD Ph: (03) LEAF RESOURCES LIMITED (LER) UPDATE MOU with Monaghan Biosciences maiden commercialisation project DIRECTORS Dr Jay Hetzel, Chairman Ken Richards, Managing Director Charles Wilson, Non-Executive Director Matt Morgan, Non-Executive Director MARKET DATA ASX Code: LER Current Price $ Week Range: $ $0.23 Market Capitalisation: $17.0 million Enterprise Value: $16.3 million CAPITAL STRUCTURE Shares on Issue: FINANCIAL SUMMARY $ (A) million (A) Net Profit (1,525) (1,913) Net Cash Total Assets 623 1,216 Shareholders Equity SENIOR ANALYST Michael Gordon (03) October 2015 KEY POINTS Pre-feasibility for a commercial bio-chemicals facility incorporating LER s Glycell TM process underway with Monaghan Biosciences, a subsidiary of Monaghan Mushrooms, one of the world s largest producers of mushrooms. This stage involves testing of the mushroom substrate, identification of potential plant sites, supply chain participants and partners. Next phase will be a bankable feasibility study, which we expect to get underway during INVESTMENT PROPOSITION Leaf Resources MOU with Monaghan Biosciences is shaping up as a breakthrough deal to commercialise its new biomass pre-treatment process. The market valuation is yet to reflect the validation of the company s technology let alone potential success of its commercialisation strategies. This will change as this project is increasingly de-risked as it moves through the pre-feasibility and bankable feasibility stages towards development. Considerable value will be created as the project progresses but the share price is likely to remain sensitive to news flow until the progress of this maiden project is more mature. Gordon Capital Pty Ltd Page 1 of 6

2 EVENT Leaf Resources has signed a Memorandum of Understanding (MOU) with Monaghan Biosciences and its parent company Monaghan Mushrooms to establish a viable renewable chemical project utilising Monaghan Mushroom s spent mushroom substrate as feedstock and Monaghan Biosciences enzyme technology integrated to the Leaf Resources Glycell TM cellulosic sugar platform. The MOU objective is to achieve a bankable feasibility study for a bio-chemicals project. The project, initially a 50/50 joint venture, will showcase Leaf Resources Glycell TM process and Monaghan Biosciences enzyme technology. ANALYSIS This MOU with Monaghan Biosciences is a breakthrough agreement and the first step towards full scale production of cellulosic sugars based on Leaf Resources Glycell TM process. Importantly for Leaf, it also expands its strategic options in marketing the technology. The anticipated end game, will be an announcement within about 18 months or so of the go-ahead for a facility with a 200tpa plant, incorporating the Glycell TM process to produce cellulosic sugars as a key raw material which together with Monaghan s enzymes will produce bio-chemicals. The total investment requirement will probably exceed $200 million. Leaf s marketing has to this point been primarily focussed on building interest in the technology and having these interested parties review the data and to undertake their own testing with a view to incorporating the Glycell TM process in their own production platforms. This remains a major objective but this project will partly change this dynamic by bringing third parties in the supply/production chain into the project. In other words, it opens up the opportunity for other interested parties to potentially participate in what will most likely be the maiden commercial project for the Glycell TM process. The first stage, pre-feasibility, is now underway and covers the collection of data, identification of potential site locations and of potential partners and supply/production chain participants. Spent mushroom substrate from Monaghan s mushroom production operations will be tested in a European lab as well as at Andritz s production plant in Ohio, USA (Andritz is a global engineering group servicing the pulp and paper and other industries with whom LER has worked with in testing its technology). A full bankable feasibility study will be undertaken once this work has been completed. This stage will bring together all the elements, other than financing required to develop the planned facility including design, engineering, supply chain logistics and offtake arrangements. Monaghan Biosciences is part of the Monaghan Mushrooms Group located in Tyholland, County Monaghan in Ireland. Among a wide range of competencies, it has broad experience in the cellulosic ethanol industry as well as developing industrial enzymes for nutrition, cosmetic and other markets. The company also develops custom enzymatic processes for its collaboration partners. Monaghan Mushrooms is one of the world s largest producers of mushrooms with plants in Ireland, the UK, Europe, and Canada. As a starting point, this project is on a 50/50 basis although there will be dilution over time as other partners are brought in and financing structures are put in place. It is far too early to speculate on likely structures however, EU funding may be available and some level of debt is likely to form part of the final package. Gordon Capital Pty Ltd Page 2 of 6

3 Leaf Resources has undertaken considerable testing, in conjunction with Andritz, and more recently commissioned studies that confirm the substantial cost savings and production efficiencies of the Glycell TM process, which underpin the value proposition. This project, and the work in developing the bankable feasibility study in particular, will bring all this effort together at the commercial level. Although it will be some time before a plant will be commissioned and generating revenue, the Glycell TM process is entering a major value creating phase as the various elements of the project are brought together including design, engineering, finance, input logistics, offtake agreements and so on. This is not unlike the process in developing a major resources project. BUSINESS OVERVIEW Leaf Resources owns the IP (for which it has three provisional patents) for a new pre-treatment process to extract cellulose from biomass that has the potential to reshape the economics of using large scale renewable biomass as a feedstock into the chemicals, plastics and other downstream industries. Production tests have validated the process and independent modelling points to a markedly lower cost of processing biomass with the prospect of unblocking the major barrier to widespread use of cellulose as an alternative for fossil fuels in the manufacturing chain. Biomass is biological material derived from living, or recently living organisms and most often refers to plants or plant-based materials. Typical sources of biomass are wood, agricultural crops, forest and agricultural residues, as well as urban organic waste. Whilst biomass can be combusted to generate heat, it is typically processed to release cellulose as a feedstock into the manufacturing chain. A complex pre-treatment process is required to break down the plant walls by destroying the tight lignin wrapping enclosing the biomass. Once this is achieved, sugars are extracted using enzymes. Cellulose maybe directly used as a feedstock into a wide range of agricultural, pharmaceutical, food and other industrial products or more commonly further processed and converted into (cellulosic) sugars as another feedstock route to an even wider range of products. Pre-treatment processes typically in use are either steam explosion or chemical based, which usually require substantial capital expenditure, large amounts of energy and or toxic chemicals. Pilot production tests of Leaf Resources Glycell TM process point to lower capital and operating costs, thereby breaking through cost barriers that have inhibited the development of bio-industries. The process uses established engineering technology, but much less energy and glycerol, a low cost, waste reagent, as a catalyst. Importantly testing has been undertaken with a variety of biomass feedstocks and the process has been shown to be effective with both woody and non-woody feedstocks. The implications are that a wider range of biomass can be economically processed for cellulose including low grade plantation waste. Moreover, it opens the way for the use of low value marginal agricultural land to be used for growing biomass, specifically for industrial use. The capital cost is highly competitive due to the use of off the shelf equipment. Moreover, the equipment can be retrofitted to existing engineering infrastructure which will make the Glycell TM process viable for existing biomass processors. Gordon Capital Pty Ltd Page 3 of 6

4 More recent work on the process has successfully focused on converting otherwise waste lignin and glycerol into valuable co-products which now contribute to the large reduction in opex costs being achieved. Moreover, the commercially viable scale of a full-scale production plant has been markedly reduced (compared with other processes) potentially saving considerable capex as well as opex. Accordingly, the Glycell TM process is now positioned at the very bottom of the industry cost curve and is highly competitive on cost and output quality. An assumption in early modelling by LER was that the glycerol used as the catalyst would be a waste product. However, 95% of the glycerol used in the process can now be recovered. Moreover, the process leads to a higher purity, higher value glycerol which can be sold into other markets substantially reducing the overall cost of producing cellulose and significantly increasing the IRR. A recent study by independent analyst, ResourceInvest Pty Ltd compared Leaf Resources Glycell TM process with a dilute acid pre-treatment process as described by NREL (National Renewable Energy Laboratory, a division of the US Department of Energy) and concluded that Leaf Resources Glycell TM pre-treatment process offers compelling cost advantages over current practice dilute acid pre-treatment. The Glycell TM process can produce cellulosic sugars at under $50 per tonne when co-products are included. This compares with $220 per tonne for sugars produced from the conversion of corn starch, the cheapest alternative and $280 per tonne for raw sugar. This is a cost advantage of almost 60% compared to NREL dilute acid after co-product revenue is considered. With the glycerol now a valuable co-product, LER s latest economic analysis demonstrates that Glycell TM process has the potential to change the face of global renewable production by dramatically reducing the cost of the main feedstock for bio based chemicals, plastics and biofuels. Having being validated in production trials, the Gycell TM process has gained industry attention and management is now pursuing commercial discussions with a range of industry leading downstream manufacturers regarding potential scenarios for the commercialisation of the process. The key next steps and milestones for the company are to engage with potential downstream partners and to engage with companies needing cellulosic sugars and companies needing renewable chemicals with a view to ultimately securing commercial agreements which will deliver financial returns to the company. A recently signed MOU with Monaghan Biosciences paves the way towards full scale commercialisation of the Glycell TM process. Pre- feasibility work is underway with a full bankable feasibility study expected to be commenced during This study will cover all work required to develop a commercial scale plant short of completing the financing structure. It will include all design, engineering, supply chain logistics and offtake arrangements. The pathway to commercialisation will most likely be through two streams. Having a clear competitive advantage in producing cellulose, Leaf Resources is likely to seek to maintain interests in the production value chain where cellulose is to be sold directly as a feedstock. This may involve partnerships, coinvestment or other joint relationships, such as with Monaghan Biosciences. Alternatively, the technology may be licenced to third parties in the sugars stream, seeking to add value to their own technologies. Leaf Resources has already attracted interest from major agri-chemical, bio-chemical, bio-energy and bioengineering companies and early discussions with some of these groups will ensure that multiple options for moving forward will emerge. Gordon Capital Pty Ltd Page 4 of 6

5 BUSINESS DRIVERS AND GROWTH PROFILE Cellulose has long being hailed as the industrial material of the 21 st century and as the replacement for oil as the primary source of energy to drive economic growth. The process of converting biomass into cellulose has long been understood. Food grade sugar production, pulp for paper manufacturing and ethanol fuel production are well established examples of the conversion of biomass. Rising wealth and increasing consumer and industrial demand in China, India and elsewhere coupled with the limited ability of the oil industry to meet this demand, as well as fears of energy security in North America and Europe have driven the search for alternative sources of energy. Concerns about climate change have also contributed to the pressure for a green renewable energy source for industrial use. Whilst oil will remain the primary industrial feedstock for a long time, plateauing (if not falling) production and rising marginal costs of production will create an widening gap in the supply chain which is capable of being filled by biomass. The potential of biomass and more specifically cellulose as a source of renewable feedstock into the industrial supply chain has been well understood but there have been a number of major barriers to progress. Firstly, the sharp increase in demand for ethanol in the early years of the new century, typically underpinned by government subsidies and mandates, highlighted the tension between the food chain and energy chain. Clearly there are global risks in diverting land and raw materials used in the food chain to energy production. Secondly, cellulose production costs have generally been too high to replace oil as the primary feedstock in industrial processing. SAPPI, one of the world s leading producers of pulp and paper estimated (2011) global production capacity of chemical cellulose at only 5.8 million tonnes, of which about half was used by the textile industry. By way of comparison, the capacity of the market pulp industry exceeded 55 million tonnes. SAPPI points out that due to the persistent decline in area sown to cotton and the forecast 22% reduction in sown area by 2030 an expanding gap raw material source is emerging as demand for textiles continues to rise. Industry is already moving to fill this gap with additional chemical cellulose production capacity. Morgan Stanley in a 2012 report on the Bioplastics industry reckoned that bio-based products represented less than 0.5% of the plastics market. But with an increase in penetration to around 5% share by 2020, representing annual sales growth of about 40%, the risks were on the upside. Various groups, including Lenzing, Markets and Markets, Lux Research, European Forum for Industrial Biotechnology and others, have also forecast substantial increases in demand and supply of cellulose derivatives, bioplastics and green chemicals over the next few years. Academic and industry research into all aspects of the biomass/cellulose industrial chain is at high levels. However, the pre-treatment process to break down biomass into cellulose is widely seen as a barrier to the development of the industry. High capital costs, high energy usage and toxic chemicals generally mean that economic viability is dependent on high grade biomass and high value downstream products. Leaf Resources Glycell TM process has the potential to markedly lower pre-treatment costs and fundamentally change in the economics of biomass opening the way to major expansion in this renewable industry. Gordon Capital Pty Ltd Page 5 of 6

6 GENERAL ADVICE WARNING: The information contained in this Report is only of a general nature and does not constitute personal financial product advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Therefore, before acting on the advice readers should consider the appropriateness of the advice with regard to their particular objectives, financial situation and needs. Readers should obtain and consider any relevant Product Disclosure Statements before making any decisions about the subject matter of this Report and should seek independent professional advice. DISCLAIMER: Although every attempt has been made to verify the accuracy of information contained in this Report, Gordon Capital Pty Ltd (Gordon Capital) and Interprac Financial Planning Pty Ltd (Interprac) make no warranties about the accuracy or completeness of any advice or information. The officers, agents, related affiliates, related body corporate and employees of Gordon Capital and Pearce accept no liability for any loss or damage whatsoever arising from any investment decisions or use of the information or advice in this Report. All information and advice contained in the Report are subject to change without notice. All investment decisions are subject to risks. Past performance should not be taken as an indication of future performance. Any forward looking statements contained in this Report are based on current expectations about future events. Words such as anticipate, believe, expect, project, forecast, estimate, likely, intend, should, could, may, target, plan may identify forward looking statements. Such forward looking statements are based on views held at the date of publication of this Report and are not guarantees as to future events. Forward looking statements are subject to risks, uncertainties and other factors beyond the control of Gordon or Pearce. Therefore, actual results may differ from those referred to in such statements. DISCLOSURE: This publication has been prepared by Gordon Capital Pty Ltd, as Authorised Representative of Interprac Financial Planning Pty Ltd, Australian Financial Services Licence No The registered office of Interprac Financial Planning Pty Ltd is Level 3, Palmerston Crs, South Melbourne, VIC Please note that Gordon Capital has been retained by Leaf Resources Limited to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report. Michael Gordon the analyst responsible for this report does not receive any indirect benefits or assistance from Leaf Resources. Our remuneration is not linked to the views expressed in this report. However, at the time of writing the report, the author owns shares in Leaf Resources Ltd. Gordon Capital Pty Ltd Page 6 of 6